Happy Constitution Day!

Recently, a friend on Open Salon asked how I managed to keep reading and writing about politics, when the last few months have been so full of disappointment and frustration. Part of my answer was simple dorkness:

I’ve been reading a lot about the American revolution — right now I’m working on an Alexander Hamilton biography — and everything about that time reminds me that everything we’re looking at now, all of the ugliness, all of the craziness — it was ten times worse back then, and the country was much shakier at the time, too. I mean, Thomas Jefferson and John Adams both took over newspapers to essentially slander each other’s characters, Alexander Hamilton was killed by a former vice president in a duel, and now we remember them as wise heroes of a kinder age. And they fought all their battles when the country could’ve easily broken apart around them. So I spend some time telling myself, OK, things suck, people are getting crazy and illogical, but — at the end of this, even if things go as badly as they possibly could, we’ll still have the status quo, which is a functioning government, regular elections, and continued chances to change things every time we go to the polls.

I’ve kept thinking about this as time has gone on and as I’ve read more about the early years of the Revolution. Unlike now, every one of those early patriots had to go to bed with the fear that he would wake not to another day of controversy in America, but to a new day of no country at all. Anarchy and chaos were real possibilities. No matter how terrible things get — and yes, they’ve been pretty terrible of late — I have never gone to sleep thinking that, perhaps, tomorrow, there will be no more United States.

Maybe that’s terrible optimism. Governments rise and fall all the time in the world, in countries small and large, and people survive. I’d like to think that I’m not so blindly tied to my nationality that I could survive in a world without America, where an American identity was meaningless — but I’m not sure it’s true.

Thus today is of special import for me. It’s Constitution Day. Two hundred and twenty-two years ago, on September 17, 1787, the new Constitution of the United States of America was adopted by the Constitutional Convention, signed by the 39 delegates, and sent out to the states for ratification. The National Archives, where the original text still lives, headlines it as “a model of cooperative statesmanship and the art of compromise,” and that has continued to be true throughout its history. We may not agree upon its meaning, always, or its deployment, but Americans almost to a person seem to agree upon its value. Our stability as a country — and we are a shockingly stable union — rests most firmly upon the survival of this document.

That’s not to say that the Constitution is a stony, implacable thing. In fact, even its adoption didn’t really mark its birth.  It would take another three years before the Bill of Rights were added, in 1791, and it’s been amended another 17 times since then. Even now, there are several proposals for amendment before Congress. Sure, it’s been used for good and for ill, to justify moments of greatness and horrible errors, but it’s still there, binding us to a common set of purposes. Is it outdated? Moldy in language and, certainly, in its descriptions of who should be a citizen? Absolutely. But what do you expect from the oldest written national constitution in the world? Perfection? No — never in our Constitution. It is a document notable for its mistakes, but also for its ability to rise above them, to amend its own content without changing its real purpose. It is a truly American thing.

So — go forth and celebrate like it’s 1787. Lift an ale (Sam Adams, anyone?), try the Which Founding Father Are You? quiz (I’m James Madison), take a stroll about your free and enduring country, and meditate on the meaning of the document still holding us together:

We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

Gov’t for Grown-ups: I have Federal Reservations for 3

I’ve neglected this series for a long time.  Not for very good reasons — it can mostly be summed up by “writer’s block,” having to do with a precipitous drop in my ability to write about Congress in an informative manner instead of one laced with profanity.  So I’m back, and I’m refocusing my attention, at least for now, on institutions, instead of political positions.  If I’m going to want to burn something down, better it be an entire building constructed from marble than a man in a suit.

So, let’s talk The Fed.

This is going to be a long talk, so I’m breaking it into three tasty pieces: A Brief History of U.S. Banking (1790-1930ish); The Federal Reserve, from Depression to Inflation (1930ish to 1980ish); and The Post-Modern Fed (1980ish to current) — if the TALF is still alive by then.

There will be a one-week guacamole intermission between posts.  Guacamole making and consumption is also encouraged while reading — if you need to step away, I’ll still be here.  Take your time.

A Brief History of U.S. Banking.

At the same time America became a country, it was also, in the great American tradition, broke.  A debate ensued about what to do — pay off the debts incurred by states before they were even states?  Say “screw it” and move on?  It was hard to decide what to do — individual states, and sometimes even individual cities and banks, were using different notes to denote debts, so it was hard to say what was even owed.

Enter Alexander Hamilton.  I should at this point again disclose a fascination and admiration for Hamilton, the father of the U.S. banking system and probably a total jerk to hang out with.  In 1791, Hamilton, the first Secretary of the Treasury, convinced Congress to create the First Bank of the United States, arguing in part that a strong financial institution would benefit everyone by making the nation itself stronger and more certain to survive:

[A]n attentive consideration of the tendency of an institution immediately connected with the national government which will interweave itself into the monied interest of every state, which will by its notes insinuate itself into every branch of industry and will affect the interests of all classes of the community, ought to produce strong prepossessions in its favor in all who consider the firm establishment of the national government as necessary to the safety & happiness of the country, and who at the same time believe that it stands in need of additional props.

This was a hard argument to make to a country skeptical of any broad central grant of power.  Yet Hamilton, who also established the U.S. Mint, managed to win a 20-year guarantee for the First Bank.  Sadly, it outlived him, then lost its own duel with Congress — by one vote, the bank wasn’t renewed in 1811.

Yet by 1816, the U.S. was hungry for some central, organizing force to look over banks, bankers, and monetary policy.  So the Second Bank of the U.S. came to life.  You probably know how this story ends, but let’s let the White House history of President Andrew Jackson tell it:

The greatest party battle centered around the Second Bank of the United
States, a private corporation but virtually a Government-sponsored monopoly. When Jackson appeared hostile toward it, the Bank threw its power against him.

Clay and Webster, who had acted as attorneys for the Bank, led the fight for its recharter in Congress. “The bank,” Jackson told Martin Van Buren, “is trying to kill me, but I will kill it!” Jackson, in vetoing the recharter bill, charged the Bank with undue economic privilege.

So, back to no bank.  Ho-hum.  The U.S. muddled on with no national currency until the National Banking Act of 1863 essentially black-mailed people into adopting national notes, by a) creating them and then b) establishing a tax on state-issued notes, but not federal notes, which were backed by treasury securities.  Yes, yes, they had securities back then, too.  People still traded in state-based notes, because people are irrational, but the spread of national currency gained some footing.

Yet this “national banking system” had its own snags [.pdf]:

Under this system, “country banks” were required to hold reserves at larger banks as well as in the form of cash. ”Reserve city banks” were required to hold reserves in cash and as deposits in “central reserve city banks.” Central reserve city banks were required to hold their reserves in cash. The Treasury Department altered reserve levels by adding or draining funds that it kept on deposit at central reserve city banks. The large city banks were unable to respond adequately to seasonal and cyclical variations in the cash and credit requirements of the economy. The years were marked by periodic financial crises that were resolved primarily through emergency actions of private bankers.

Those “bankers” we led by J.P. Morgan, who was kind enough to bail out the system in 1893 when panic ensued.  In 1907, he did it again — and public opinion, long opposed to the very idea of a central bank, suddenly swung more decisively toward desirous.

But hey, this is government — why rush into anything?  Congress, being Congress, appointed a commission to look into the best way to tackle the banking problem.  Meanwhile, William Jennings Bryan stormed the country cheering for the Silver Standard (and was immortalized as the Cowardly Lion in “The Wizard of Oz” for his efforts).  Finally, President Wilson leaned on Congressman Carter Glass to get something done, and in 1913 the Glass-Willis bill, known as the Federal Reserve Act, birthed the modern Fed, a bouncing several-million-dollars baby.  It established:

• Twelve regional bank districts
• That all national banks had to buy into the Fed at a rate of six percent of the bank’s current capital stock, in exchange for voting rights
• That should the Fed not have sufficient money through bank and personal buy-ins, the Treasury Department would buy in.
• The Federal Reserve Board’s power to examine “accounts, books, and affairs” of member banks
• Individual regional boards’ power to set Discount Rates — the interest rates at which banks could borrow from the Fed.
• The Federal Reserve as the “lender of last resort,” where banks could turn when they faced a panic.
• The Federal Reserve as the primary issuer of Federal Reserve Notes — what we now know as “dollars.”  A sample from the first run, Series 1914, is seen above, starring Grover Cleaveland.

The four big provisions that came out of the Fed’s charter were “to
provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.”

Ta-Da!  A Central Bank at last.  The actual responsibilities of the bank, other than to provide stability to the system, were somewhat undefined for the next two decades, however.  The bank dabbled in the 1920s with some Open Market interventions, but with little success — though aware of the speculation bubble of the late 20s, it did little (and some might argue it could do little) to stop it; it did even less to alleviate the stress on banks as the downturn turned into a full-blown Depression.  In fact, the Reserve Board and the governors raised some rates in the early 30s and wanted to raise rates further, through a sell-off of treasury securities, even as things got bad again in 1932.

Which takes us to the fall of the first Fed system, with the introduction of Franklin D. Roosevelt’s financial policies and politics.  But if you’ve made it this far, I’d guess you’re as ready for a guacamole break as I am.  So we’ll pick up here next time — though in the interim, if things are unclear above, throw me questions in the comments.  I’m trying to compress many sources into one long explanation, so I may have made things blurrier — and I’m happy to help clarify, as I can. Likewise, if I’ve skipped something vital — well, you’ll tell me, right?

Till next time, then.