Creature From Jekyll Island by G. Edward

inflate American dollars to assist the ailing

British economy.

The period between the Civil War and the enactment of the Federal Reserve System was one of great economic volatility and no small measure of chaos. The National Banking Acts of 1863-65

established a system of federally chartered banks which were given significant privilege and power over the monetary system. They were granted a monopoly in the issuance of bank notes, and the government agreed to accept those notes for the payment of taxes and duties. They were allowed to back this money up to ninety per cent with government bonds instead of gold. And they were guaranteed that every bank in the system would have to accept the notes of every other bank at face value, regardless of how shaky their position. The net effect was that the banking system of the United States after the Civil War, far from being free and unregulated as some historians have claimed, was literally a halfway house to central banking.

The notion of being able to generate prosperity simply by creating more money has always fascinated politicians and businessmen, but at no time in our history was it more in vogue than in the second half of the nineteenth century. The nation had gone mad with the Midas complex, a compulsion to turn everything into money through the magic of banking. Personal checks gradually had become accepted in commerce just as readily as bank notes, and the banks obliged their customers by entering into their passbooks just as many little numbers as they cared to 'borrow.' As Groseclose 408 THE CREATURE FROM JEKYLL ISLAND

observed: 'The manna of cheap money became the universal cry, and as with the Israelites, the easier the manna was acquired, the louder became the complaint, the less willing the people to struggle for it.'1

The prevailing philosophy of that time was aptly expressed by Jay Cooke, the famous financier who had marketed the huge Civil War loans of the federal government and who now was raising $100

million for the Northern Pacific Railroad. Cooke had published a pamphlet which was aptly summarized by its own title: How Our National Debt May Be a National Blessing. The Debt is Public Wealth, Political Union, Protection of Industry, Secure Basis for National Currency. 'Why,' asked Cooke, 'should this Grand and Glorious country be stunted and dwarfed—its activities chilled and its very life blood curdled by these miserable 'hard coin' theories—the musty theories of a bygone age.'2 As it turned out, however, the chilling and curdling came, not from the musty hard-coin theories of the past, but from the glittering easy-money theories of the present. The Northern Pacific went bankrupt and, as the mountain of imaginary money invested in it collapsed back into nothing, Cooke's giant investment firm disappeared along with it, triggering the panic of 1873 as it went. Matthew Josephson writes:

'All about the failure of Jay Cooke!' newsboys hawked throughout the country....

The largest and most pious bank in the Western world had fallen with the effect of a thunderclap. Soon allied brokers and national banks and 5,000 commercial houses followed it into the abyss of bankruptcy. All day long, in Wall Street, one suspension after another was announced; railroads failed; leading stocks lost 30 to 40 points, or half their value, within the hour; immeasurable waves of fear altered the movement of greed; the exchanges were closed; the stampede, the

'greatest' crisis in American history, was on.

AND STILL MORE BOOMS AND BUSTS

Altogether, there were four major contractions of the money supply during this period: the so-called panics of 1873, 1884, 1893, and 1907. Each of them was characterized by inadequate bank reserves and the suspension of specie payment. Congress reacted, 1. Groseclose, Money and Man, p. 202.

2. Quoted by Rothbard, Mystery, p. 231.

3. Matthew Josephson, The Robber Barons: The Great American Capitalists, 1861-1901

(New York: Harcourt Brace Jovanovich, 1934), p. 170.

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not by requiring an increase in reserves which would have improved the safety margin, but by allowing a decrease. In June of 1874, legislation was passed which permitted the banks to back their notes entirely with government bonds. That, of course, meant more fiat money for Congress, but it also meant that bank notes no longer had any specie backing at all, not even ten per cent. This released over $20 million from bank reserves which then could be used as the basis for pyramiding even more checkbook money into the economy.

It has become accepted mythology that these panics were

caused by seasonal demands for farm loans at harvest time. To supply those funds, the country banks had to draw down their cash reserves which generally were deposited with the larger city banks.

This thinned out the reserves held in the cities, and the whole system became more vulnerable. Actually that part of the legend is true, but apparently no one is expected to ask questions about the rest of the story. Several of them come to mind. Why wasn't there a panic every Autumn instead of just every eleven years or so? Why didn't all banks—country or city—maintain adequate reserves to cover their depositor demands? And why didn't they do this in all seasons of the year? Why would merely saying no to some loan ap-plicants cause hundreds of banks to fail? The myth falls apart under the weight of these questions.

The truth is that, if it hadn't been seasonal demand by agriculture, the money magicians simply would have found another scapegoat. It would have been 'immobile' reserves, lack of 'elasticity' in the money supply, 'imbalance' of international payments, or some other technocratic smoke screen to cover the real problem which Was-—and always has been—fractional-reserve banking itself. The bottom line was that, in spite of an elaborate scheme to pool the minuscule reserves of country banks into larger regional banks where they could be rushed from town to town like a keg of coins on the old frontier, it still didn't work. The loaves and fishes stubbornly refused to multiply.

MORGAN PROSPERS WHEN OTHERS FAIL