1913

"Fed Sees Recovery Lagging" ---WSJ Headline, 8 June 2011

Really? For those not surprised by this news, "well, I've heard the Brooklyn bridge is for sale." After many months of stimulative monetary policy, it appears that we've come close to using up the central bank's available "tools" in which to move our economy toward growth; unless, of course, we desire to go the way of the 1920s Weimar Republic. In the WSJ article, the mastermind of our present Fed policy, Ben Bernanke, candidly admits that, "in this context, monetary policy cannot be a panacea."

It may be said that certain years serve as historical ‘pivots.’ For significant reasons, they move us toward a new reality or paradigm. In American culture, one need only cite a particular year and profound images flow forth. Some that come to mind are 1776, 1865, 1929, and 1941. Whereas the Declaration of Independence, end of the Civil War, Stock Market Crash, and Pearl Harbor occupy major historical images for most Americans, I ask…what about 1913? I submit that, to a certain extent, America’s present fiscal and financial crises began there. And perhaps, three events from that year set in motion a mighty wave, one that has catapulted us to our current economic and political predicament: the death of J.P. Morgan; passage of the Federal Reserve Act; and ratification of the sixteenth amendment to the United States Constitution.

With J.P. Morgan’s passing on March 31, 1913, a mighty figure exited our nation’s financial history. In 1901, Morgan was one of the wealthiest men in the world and in that same year was the primary financier involved in the merger of Carnegie Steel Company with several others in order to create United States Steel, America’s first billion dollar corporation. During the Panic of 1907, it was Morgan who would wield his significant influence, in effect acting in the capacity of a yet to be created Federal Reserve System. Singlehandedly, he would pledge many of his own assets in order to shore up a failing banking system. At the time, Morgan operated within a financial system where ‘credit,’ as we know it today, was given mostly to financiers, corporations, and wealthy individuals. For Morgan, the advancement of ‘credit’ was multifaceted. One needed to possess both the ability to repay the obligation, but also, the character or honor to follow through on the transaction. An individual who fulfilled their credit obligation was truly ‘a credit to their generation.’ In every sense, ‘credit’ could be characterized as a trust given and a trust fulfilled.

Monetary policy, as we know it today, saw its infancy debated upon the floor of the United States Senate when, on December 13, 1913, the senator from New York, Elihu Root, rose to discuss the Federal Reserve Bill. Root was a man of achievement and considerable wisdom, having been awarded the Nobel Peace Prize and served as Secretary of War under President McKinley and as Secretary of State under President Theodore Roosevelt. And yet, he recognized that the die had already been cast for the creation of a Central Bank. Nevertheless, for three hours he spoke and noted that the American nation was going to be the recipient of an elastic currency; one that didn’t have to be inflationary, but that most likely would. Quoting Root…

“Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community. Bankers are not free from it. They are human. The members of the Federal Reserve board will not be free of it. They are human. Regional bankers will not be free of it. They are human. All the world moves along upon a growing tide of optimism. Everyone is making money. Everyone is growing rich. It goes up and up, the margin between cost and sales continually growing smaller as a result of the operation of inevitable laws, until finally someone whose judgment was bad, someone whose capacity for business was small breaks; and as he falls he hits the next brick in the row, and then another, and then another, and down comes the whole structure…This bill proposes, however, to put in pawn the credit of the United States; and when your time of need comes, it is the United States that is discredited by the inflation of its demand obligations which it can not pay.”

That year, the nations’ fiscal policy (that is, its ability to tax and spend) would also find some elasticity, or room for growth. With the ratification of the Sixteenth Amendment to the United States Constitution, on February 3rd, these new words became enshrined: 

“The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

And we were off to the races, with lessons to be learned in each subsequent decade- up until the present. Today’s lesson? There are many, to be sure. But perhaps the greatest, given the calculated devaluation of our currency at the hands of the Fed, and the ratcheting up of our debt to astronomical heights by our elected leaders, is that our present actions matter- and ultimately drive us toward a future that requires reckoning. A reckoning that may be happening before our very eyes. And 1913? Perhaps 1913 was the year when a young nation was given its driver license. Through driver training, it was shown how to accelerate, particularly given the tremendous powers inherent in the Federal Reserve and the Sixteenth Amendment. But was it ever shown how to stop?