Tuesday, November 16, 2010

Money money money

The question of how the national financial system should be organized has plagued the United States from its inception. Alexander Hamilton established the first National Bank as part of a program to create a firm, centralized footing for collecting tax receipts, control the monetary supply, tie the fortunes of elites to the nation's economic future and create a ready source for government loans. His Democratic Republican opponents, however, strenuously opposed the system, arguing it carried federal power far beyond what had been granted in the Constitution. Consequently, once the Federalist Party left the executive, the charter of the first National Bank was allowed to lapse.

The events of the War of 1812, when, among other things, the country nearly went bankrupt, led even the Democratic Republicans to believe a National Bank was necessary to ensure true economic independence from Britain. Accordingly, President James Madison signed a second National Bank bill into law in 1816. Once again, however, centralized banking fell out of favor, as the new Democratic Party gained increasing power, opposition to economic elitism became the rallying cry of the masses and Andrew Jackson was elected to the presidency. Jackson, once again, let the National Bank lapse. Several decades of decentralized banking practice followed.

By the early 1900s, tired of up-and-down swings in the national economy, the federal government under President Woodrow Wilson established the Federal Reserve System, which formally opened on this day in 1914. A uniform federal monetary policy was deemed the best way to administer the economy. Alterations in monetary supply and interest rates could smooth out the bumps and dips in the American economy.

Ultimately, of course, we have continued to have bumps and dips... most notably, that little episode called the "Great Depression" that transpired less than twenty years after the Fed was established, although it is worth noting that many historians have described how different decisions on the part of the Fed might have lessened the Depression's impact. In other words, it was not the institution so much as it was the practice. Today, however, in the midst of another recession, there is growing sentiment in some areas of the country against federal involvement in monetary policy. The November edition of The Atlantic featured a profile on Ron Paul, the Texas Republican (Libertarian, more accurately) who advocates a return to the gold standard and routinely excoriates the actions of the Fed. We live in interesting times. Will we see another transition?

No comments: