In history, certain years are pivotal. For Americans, 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 will never be forgotten, I ask…what about 1913? In recalling that year, I submit that to a certain extent, America’s present fiscal and financial crises began there. Three events from that year set in motion a mighty wave that has catapulted us to our present 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 Morgan’s passing on March 31, 1913, a mighty figure exited our nation’s financial history. In 1901, J.P. 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 wielded his significant influence, in effect acting in the capacity of a yet-to-be created Federal Reserve System. Singlehandedly, he pledged many of his own assets 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, its advancement was multifaceted. One needed to possess both the ability to repay the obligation and the character and honor to follow through on the transaction. One who fulfilled his credit obligation was truly “a credit to his generation.” As such, credit was characterized as a trust given and a trust fulfilled.
As we know it today, monetary policy 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. He recognized that the die had 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 need to be inflationary, but that most likely would.
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) also realized some elasticity and room for growth. With the ratification of the Sixteenth Amendment to the United States Constitution on February 3rd, 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.
With economic history and lessons to be learned, we were off to the races. Today’s lesson? There are many, to be sure. With trillions having been injected into our financial system and the national debt driven to astronomical heights, politicians and professors proclaim that we need not worry and that all will be well. But I wonder. Despite Professor Keynes’ observation that in the long run, we are all dead, does it follow that responsible actions no longer matter?
If the wisdom of the day prevails, perhaps a day of reckoning will never appear. Perhaps.