I’m reading “13 Bankers,” a just published book written by Simon Johnson and James Kwak. The preface to this book says, “Even after the ruinous financial crisis of 2008, America is still beset by the depredation of an oligarchy that is now bigger, more profitable, and more resistant to regulation than ever. The six megabanks … together control assets amounting, astonishingly, to more than 60% of the country’s Gross Domestic Product … continue to hold the global economy hostage, threatening yet another financial meltdown.”
The question: “How did this come to be — and what is to be done?”
The book has seven chapters and I’m intending on reporting on each chapter and printing excerpts from each chapter. Today, I’m excerpting Chapter One, “Thomas Jefferson and the Financial Aristocracy.” This chapter is 25 pages and outlines the historical framework of today’s financial crisis. The sentence that most caught my eye in this chapter describes banking after the big reforms made in response in The Great Depression: “Postwar commercial banking became similar to a regulated utility, enjoying moderate profits with little risk and low competition.” Tomorrow, I’m excepting Chapter Two: “Other People’s Oligarchs”
From “13 Bankers,” Chapter One: “Thomas Jefferson and the Financial Aristocracy.”
- Jefferson was deeply suspicious of banks and criticized them in vitriolic terms, writing, “I sincerely believe, with you, that banking institutions are more dangerous than standing armies.”
- Jefferson was opposed by Alexander Hamilton, Washington’s secretary of the treasury, who favored a stronger federal government that actively supported economic development — particularly that government would ensure that sufficient credit was available to fund economic development and transform America into a prosperous entrepreneurial country.
- By 1825, when the United States and the United Kingdom had roughly the same population (11.1 million and 12.9 million, respectively), the United States had nearly 2.5 times the amount of bank capital as the United Kingdom.
- While Hamilton may have been right about economics, that was not Jefferson’s primary concern. His fear of large financial institutions had nothing to do with the efficient allocation of capital and everything to do with power.
- Although Jefferson lost the battle … the cause of restraining concentrated economic or financial power was taken up by three of his most important successors. In the 1830’s, Andrew Jackson showdown with the Second Bank of the United States …. At the beginning of the twentieth century … Theodore Roosevelt….During the Great Depression of the 1930’s Franklin Delano Roosevelt was finally able to break up the largest banks and constrain their risky activities.
- Both Jefferson and Jackson saw a powerful bank as a corrupting influence that could undermine the proper functioning of a democratic government.
- By the late nineteenth century, industrialization had created a powerful economic elite that held political power at all levels, with its supporters in substantial control of the Senate, the Republican Party, and the presidency.
- By the late nineteenth century, the Senate had become known as the “Millionaires’ Club.”
- New industrial trusts emerged late in the nineteenth century. … Standard Oil was an early pioneer of the trusts …A handful of bankers led by J.P. Morgan played a central role in this rapid transformation of the business landscape … Morgan’s empire handled … as much as 40% of the total capital raised at the beginning of the twentieth century.
- After McKinley’s assassination in 1901, Theodore Roosevelt adopted “trust busting” as a signature policy and made improved supervision of large corporations a major theme in his 1901 State of the Union address.
- The Panic of 1907, which nearly brought the financial system crashing down, clearly demonstrated the risks the American economy was running with a highly concentrated industrial security, a lightly regulated financial sector, and no central bank to backstop the financial system in a crisis.
- The Federal Reserve Act of 1913 reduced the autonomy of the central bank and gave the government a stronger hand in its operations, notably through a Federal Reserve Board appointed by the president.
- The Federal Reserve Act did little to constrain the banks themselves, leaving them free to engage in risky lending and generate huge economic booms that would be politically difficult to rein in. (It) had the power to engineer a bailout, but not to curb the risky activities that could make one necessary.
- The 1920’s were a period of significant deregulation, as Republican administrations dismantled the system of state control developing in order to fight the First World War. … The anti regulatory policies of the 1920’s helped make possible a period of rampant financial speculation, driven by investment banks and closely related firms that sold and traded securities in an unregulated free-for-all.
- For the last seventy years there has been heated debate over whether the Fed could have prevented the financial crisis of 1929 from evolving in the Great Depression. … Clearly something had gone badly wrong. The problem was …there was no effective check on the private banks as a group, whose appetite for risk had created a massive boom and a monumental bust.
- The magnitude and severity of the Great Depression created the opportunity for a sweeping overhaul of the relationship between government and banks.
- FDR’s favorite president was Andrew Jackson. …Both men shared an appreciation for the working of democracy and a fear that unconstrained private interests could undermine both eh economy and the political system. In a sense they were both descendants of Jefferson.
- In January 1926, Roosevelt said, “Our enemies of today are the forces of privilege and greed within our own borders … Jackson sought social justice; Jackson fought for human rights in his many battles to protect the people against autocratic or oligarchic aggression.”
- The Glass-Steagall Act (1933) separated commercial banking from investment banking to prevent commercial banks from being “infected” by the risky activities of investment banks. …As a result J.P. Morgan was forced to spin off its investment banking operations, which become Morgan Stanley.
- The system that took form after 1933, in which banks gained government protection in exchange for accepting strict regulation was the basis for half a century of financial stability — the largest in American history.
- Postwar commercial banking became similar to a regulated utility, enjoying moderate profits with little risk and low competition. …The half century following the Glass-Steagall Act saw by far the fewest bank failures in American history.
- The laws of the 1930s were intended to protect the economy from a concentrated, powerful, lightly regulated financial sector. In the 1970s they were beginning to look out of step with the modern world.
- By the 1990s, Jefferson and Jackson … seemed more irrelevant than ever, and FDR’s New Deal was under widespread attack.
- The 1990s were a decade of financial and economic crises … in emerging markets … from Latin America to Southeast Asia to Russia. Fast growing economies were periodically imploding in financial crises that imposed widespread misery on their populations. For the economic gurus in Washington, this was an opportunity to teach the rest of the world why they should become more like the United States. We did not realize they were already more like us than we cared to admit.
Written By Mike Bock
