way a bank can create money out of nothing and still be protected from a potential 'run' by its customers. In other words, it is the means by which the public is forced to pay a hidden tax of inflation to cover the shortfall of fractional-reserve banking. That is why the so-called virtue of a lender of last resort is taught with great reverence today in virtually all academic institutions offering degrees in banking and finance. It is one of the means by which the system perpetuates itself.
The banks could now inflate more radically and more in unison than before the war but, when they pushed too far and too fast, their bank-generated booms still collapsed into recessions. While this could be highly profitable to the banks, it was also precarious.
As the American economy expanded in size, the magnitude of the booms and busts increased also, and it was becoming more and more difficult for firms like Morgan & Company to safely ride out the storm. There was a growing dread that the
In addition to these concerns was the fact that many state banks, mostly in the developing Southern and Western states, had elected not to join the national banking system and, consequently, had escaped control by the Wall-Street-Washington axis. As the population expanded south and westward, much of the nation's banking moved likewise, and the new banks were becoming an increasing source of competition to the New York power center. By 1896, the number of non-national banks had grown to sixty-one per cent, and they already held fifty-four per cent of the country's total banking deposits. By 1913, the year in which the Federal Reserve Act was passed, those numbers had swelled to seventy-one per cent non-national banks holding fifty-seven per cent of the nation's deposits.1 Something had to be done to stop this movement.
1. See Kolko,
COMPETITION IS A SIN
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Additional competition was developing from the trend in industry to finance itself from profits rather than borrowed capital.
Between 1900 and 1910, seventy per cent of American corporate growth was funded internally, making industry increasingly independent of the banks. What the bankers wanted—and what many businessmen wanted also—was a more 'flexible' or 'elastic'
money supply which would allow them to create enough of it at any point in time so as to be able to drive interest rates downward at will. That would make loans to businessmen so attractive they would have little choice but to return to the bankers' stable.
TRUSTS AND CARTELS REPLACE COMPETITION
One more problem facing Wall Street was the fact that the biggest investment houses, such as Morgan & Company and Kuhn, Loeb & Company, although they remained as competitors, were by this time so large they had ceased doing serious battle against each other. The concept of trusts and cartels had dawned in America and, to those who already had made it to the top, joint ventures, market sharing, price fixing, and mergers were far more profitable than free-enterprise competition. Ron Chernow explains: Wall Street was snowballing into one big, Morgan-dominated institution. In December 1909, Pierpont had bought a majority stake in the Equitable Life Assurance Society from Thomas Fortune Ryan. This gave him strong influence over America's three biggest insurance companies—Mutual Life, Equitable, and N e w York Life.... His Bankers Trust had taken over three other banks. In 1909, he had gained control of Guaranty Trust, which through a series of mergers he converted into America's largest trust.... The core Money Trust group included J.P. Morgan and Company, First National Bank, and National City Bank....
Wall Street bankers incestuously swapped seats on each others boards. Some banks had so many overlapping directors it was hard to separate them.... The banks also shared large equity stakes in each other....
Why didn't banks just merge instead of carrying out the charade of swapping shares and board members? Most were private
partnerships or closely held banks and could have done so. The answer harked back to traditional American antipathy against concentrated financial power. The Morgan-First National-National City trio feared public retribution if it openly declared its allegiance.1
*• Chernow, pp. 152-53.
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THE CREATURE FROM JEKYLL ISLAND
Interlocking directorates and other forms of hidden control were far more safe than open consolidation but they, too, had their limitations. For one thing, they could not penetrate the barriers of similar competitive groupings. As these combines became larger and larger, ways were sought to bring
Thus was born the concept of a cartel, a 'community of interest'
among businessmen in the same field, a mechanism for coming together as partners at a high level and to reduce or eliminate
