In Defense of Gambling with Borrowed Chips, Part IV

We now get to the core of our dispute. (“At last!“ you cry.) Lament not, for we have passed through some essential preliminaries.

What is core is that Gravelle takes issue with my recommendation that the U.S. abolish its central bank, the Federal Reserve.

She says (quite accurately) that the Federal Reserve existed for 20 years before the abandonment of the gold standard in 1933. The Fed was founded by an Act signed into law by President Woodrow Wilson on December 23, 1913.

I can’t agree with her about the “why” of that decision, though. She writes that the Fed was “needed in part to deal with the rigidity of the gold standard itself, which provided insufficient money, particularly around harvest time.”

No, the Fed wasn’t needed. It came into existence as a simple matter of coalition management. What was needed, politically, was the passage and enactment of something that could be called a “banking reform bill.” There were a lot of reasons for this, most of them terrible, the best of them only slightly muddled. But the vacuity of the Federal Reserve Act as any sort of genuine reform may be seen by the four distinct currents of thought that contributed to it.

There were some important voices at the time who wanted a private and centralized banking system. They found their champion in Nelson Aldrich. There were others who wanted a system that would be private but decentralized -- this was the guiding idea of Carter Glass, chairman of the House Banking Committee when Wilson entered the White House. There was another group who demanded a system both public and decentralized -- that would describe William Jennings Bryan, for example, who was Wilson’s Secretary of State, and whose interest in monetary/banking issues was a critical source of his own appeal to his own following. Finally, there was a faction that wanted a system both public and centralized, in effect an adjunct to the U.S. Treasury. Among these was William Gibbs McAdoo, who was Wilson’s Secretary of the Treasury.

[You can find an account of all of this in the biography, Woodrow Wilson (2010), by John Milton Cooper Jr., which I reviewed for The Federal Lawyer that spring. See especially pp. 219 et seq. of that book. ]

Along the two axes involved (private/public on one side, central/decentralized on the other), there were then four possibilities and for various mutually inconsistent reasons all four factions were unhappy about the banking system, all four wanted a change. Some change was almost certain to come about, and that change (when nominally led by a Wilson, a man with no firm settled convictions of his own on the subject, but a strong desire to please everyone, or at least everyone with a suitably progressive pedigree) was bound to be a jerry-rigged mess.

We have inherited that mess, and I for one am certain that it does us all much more harm than good.
It was merely a mess for the first twenty years of its existence. After 1933, it became something much worse than a mess. The Fed became a nexus of power in its own right, and the center of machinations against the soundness of the dollar. There are always such machinations -- and there are always constituencies for them. What has proven disastrous is that they have had this great institutional leverage.

Their leverage was somewhat diluted by the Bretton Woods accord of 1944, which brought a precious metal back into the system. That brings us to the relation of hard metals and gold in particular to the value of money, which is the fourth and final point I must contest with Ms Gravelle.

Before I do, though, allow me to say this: gold is not logically necessary for the existence of a sound currency. There are other ways of achieving that goal. For example, as I write, the Republic of Greece stilll has a sound currency. That currency is known as the euro, and it is sound because its quantity is outside of the control of any politicians or central bankers within Greece. Thus, the soundness of the currency (which is as it happens not backed by gold) is forcing the Greek political system to make difficult decisions -- decisions that ought to be made but that all participants there would plainly much rather avoid.

It  is possible that Greek politicians may in fact avoid those decisions by abandoning their sound currency, and re-creating the drachma, which they can then manipulate at will. If they succumb to that temptation, though, they will I am sure rue the day.

With that understood, allow me to agree: yes, the abolition of fiat currency means, in the U.S. context and as a practical matter, the re-introduction of some role for gold. This is the one of my policy prescriptions that I haven’t yet discussed, and I will come to it tomorrow.

The Democratic Party's Nominating Convention: 1896

Once in awhile I give you, dear reader, the dubious benefit of a brief random quotation from my recent reading.  That will be the case today.

I take this from THE TRAGEDY OF WILLIAM JENNINGS BRYAN, by Gerard N. Magliocca.

The leading obstacle to Bryan's nomination came from 'Gold Democrats,' who backed President Cleveland's policies, but they soon realized that they were outnumbered.  The president opposed Bryan's candidacy and told his supporters that 'a cause worth fighting for is worth fighting for to the end.'  Neverthelss, by 1896, Cleveland did not have much influence with the party faithful.  A Gold Democrat describing the scene in Chicago said that for 'the first time, I can undersand the scenes of the French Revolution.'  The conservative senator David Hill of New York, in a desperate plea to the delegates, said: 'I am a Democrat, but not a revolutionist.  My mission here today is to unite, not to divide -- to build up, not to destroy.'

Rothbard on Bryan

Murray Rothbard on the rise of William Jennings Bryan and Bryanism in the Democratic Party.

"Poor Grover Cleveland, a hard-money laissez-faire Democrat, was blamed for the panic of 1893, and many leading Cleveland Democrats lost their gubernatorial and senatorial posts in the 1894 elections. The Cleveland Democrats were temporarily weak, and the Southern-Mountain coalition was ready to hand. Seeing this opportunity, William Jennings Bryan and his pietist coalition seized control of the Democratic Party at the momentous convention of 1896. The Democratic Party was never to be the same again."

That may require some explanation. The notion of a "pietist coalition" is key to Rothbard's understanding of US political history. The pietists were and are a certain subset of Protestant groups -- generally from those denominations that see themselves as most fiercely anti-papist, anti-hierarchal, etc. -- and they believe Christians must prepare the way for the coming of the Lord by creating just social conditions first, i.e. Jesus' return shall be "postmillennial." Thus, the state (as Rothbard conveys the pietists' view of it) must be controlled by pious folks and so organized as to hasten that glorious day.

The era of Andrew Jackson -- the President that Rothbard sees as most embodying his own laissez-faire ideas -- was also the era of the Second Great Awakening -- the revivalist movement that brought pietism in this form to the US in a big way. Pietists wanted to control both people's personal lives (through the prohibition of alcohol and Sunday closing laws for example) and the counrtry's economic life, through control of the money supply and tariffs on foreign trade. The great political divide was then, between the Democrats, who were laissez-faire on both personal and economic matters, and the Whigs or later Republicans, who were statist on both sets of matters.

Cleveland is the last figure in US political history to whom Rothbard extends any sympathy. The rise of Bryan meant the pietists had taken over both parties, and everything has been pretty steadily downhill ever since.

Colonel Roosevelt and Secretary Bryan

"Colonel Roosevelt" is the title of a new book by Edmund Morris, the final installment in his series on the life of Theodore Roosevelt, focusing on TR's post-Presidential years. I admit up-front I haven't read the book. I have only read the paraphrases and quotations from it provided by some reviewers, including Henry S. Cohn, who reviewed it for the latest issue of The Federal Lawyer.

Cohn paraphrases Morris thus: "Roosevelt could abide neither Wilson nor his secretary of state, William Jennings Bryan, who viewed the war as an exclusively European affair. Roosevelt spoke out against the 'pacifist' Bryan until he was removed from the cabinet in June 1915 and, in April 1917, Wilson asked Congress to declare war." The scare quotes around the adjective "pacifist" there are appropriate.

Yes, unfortunately for clarity the term sometimes means anyone who is arguing against any particular military intervention, and Bryan was certainly doing that as a member of Wilson's cabinet. But the term is more appropriately used for a broader, principled, commitment to a laying down of arms among nations. In that sense, neither Bryan nor Wilson was ever a pacifist. Indeed, it is well to remember that Bryan seemed to be threatening the UK with war in the course of his famous "cross of gold" speech.

It was the Bank of England that, in the imagery of that speech, was threatening mankind with crucifixion to preserve the one-metal backing for money. It was imperialism, as Bryan saw it, and "the issue of 1776 over again". At least some of Bryan's 'pacifism' in the context of 1913-15 arose from his suspicion that Anglophiles like Roosevelt were on the wrong side, the side of the still regnant world-straddling Empire. His own sympathies were with the rising challengers to that empire -- in this instance, the Germans.