Tuesday, June 8, 2010

Thomas Jefferson and the Financial Aristocracy

In the first chapter of 13 Bankers, Johnson and Kwak briefly trace the history of the relationship between financial and political power in the United States from the beginning of the Republic through the 1990s. The authors frame their discussion around the post-Revolution conflict between political tendencies represented by Thomas Jefferson and Alexander Hamiltion, the country's first secretary of the Treasury. Jefferson and his followers in the Democratic-Republican party (the forerunner of today's Democratic party) wanted the new nation to remain a primarily agrarian society based on a broad middle class of small farmers living under a limited government. Opposing them were Hamilton and the Federalist party (one of the forerunners of today's Republican party), who wanted a strong central government to create the financial and legal frameworks necessary for the creation of a modern, urban, industrial capitalist economy.

As Johnson and Kwak argue, Hamilton was likely right on the basic economic issues. It's hard to imagine a modern society built mainly on small-scale farming. But Jefferson was prescient in recognizing that the economic power gained by the new concentrated financial and industrial interests could potentially give them undue influence over government and warp politics and policymaking, threatening the premises of American democracy. This ideological conflict reached fever pitch in the 1830s, when Democratic president Andrew Jackson, an inheritor of Jefferson's mistrust of concentrated financial power, sought to revoke the charter of the Second Bank of the United States, based in Philadelphia and managed by the prominent banker Nicholas Biddle (the First Bank's charter quietly expired in 1811). After a protracted struggle, Jackson ultimately prevailed and the United States remained without a central bank or much of a coherent financial system until late in the 19th century, when the rise of large financial and industrial corporations raised new questions about the relationship between economic and political power.

The financial crises of the late 19th and early 20th century, notably the Panic of 1907 - which ended when the banker J.P. Morgan organized financial capitalists to lobby Washington for a multimillion dollar bailout (sound familiar?) - ultimately led to the establishment of the Federal Reserve in 1913. The Fed was supposed to regulate finance so that crises would be less rare, but financial interests made sure that the agency would remain basically under the control of private banks. This lax regulatory structure encouraged the wild speculation that helped to cause the Great Depression. In response, Franklin Roosevelt's New Deal banking regulations, notably the Glass-Steagall Act that separated investment from commercial banking, created a legal regime that heavily regulated banks and prevented major banking crises until the 1970s. The pendulum began to shift back toward less government regulation in the 1970s, but that's a story that Johnson and Kwak will address in later chapters.

Questions for discussion:

1) Do major concentrations of financial power, such as Wall Street banks, threaten the basic premises of American democracy as Jefferson and his followers argued? If so, then how is private control over big investment decisions that affect all of our lives justifiable?

2) Why do you think we have not seen the same kinds of financial reforms in the wake of the current crisis that we saw during the Great Depression? Financial interests were very powerful then as well, but Roosevelt took them head on. In contrast, it's difficult to imagine President Obama saying something like this:

"They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred." (FDR 1936 campaign speech)

3) Do you think that the bailouts given to many banks in the wake of the 2008 financial crisis were justified in any way? Should government be expected to step in to prevent the collapse of the financial system, or should the banks have just been allowed to fail?


Larry M. said...

I don't think concentrated private financial power is necessarily a threat to democracy. I believe a reasonable balance of power between government and financial institutions can be formed. However, that process is easily corrupted by lobbying and other flaws in the U.S. political process. I believe that the bailout was necessary. Ironically, the success of the bailout is a primary reason why more stringent financial reforms have not come out of Congress. The bailout prevented a deep, ongoing crisis like the Depression. Without a crisis of that magnitude staring the public and the government in the face, it is difficult to muster the political will to overcome the forces that want to maintain the status quo. We might look to the Canadian model of tightly governed, state-supported banks as a basis of comparison to our system. While I don't espouse that model, I would look to it to identify improvements in risk management and governance that might prevent a repeat of 2008.

Adam12 said...

I think that the bailouts were a mistake. The end result was the maintenance of institutions that were not able to competently sustain themselves. While the pain would be considerable, it would have been better in the long run to allow the system to purge itself. The bailout has not dissuaded large financial companies from avoiding questionable financial transactions. They now know that the Fed will take care of them, as long as they stay large enough to be too big too fail.

Anonymous said...

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Anonymous said...

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