America's Bank - Roger Lowenstein (Penguin Press, 2015)

A history of the conditions, events, and political maneuvering that led to the creation of the United States' third attempt at a central bank, the Federal Reserve System.  The book serves to remind those who argue against having the central bank how the world actually was in its absence.  [332.110973]

Depending on how they are counted, the Federal Reserve is the third or fourth attempt at establishing a central bank in the United States.  Central governments need a fiscal agent: a financial entity where public money can be held and that faces the rest of the economy for the collection of taxes, fees, and customs and for the disbursement of funds.  The Bank of North America,  a private bank chartered by the Confederation Congress in 1781, served that role during the earliest days of the Republic.  When it was re-chartered as a Pennsylvania bank, it could no longer serve the necessary role.

The Bank of the United States, as designed by Alexander Hamilton, was then chartered for twenty years to take up the role of the central bank.  It served as the fiscal agent of the government, but did not provide a uniform currency.  When the Bank's charter was due for renewal, the Jeffersonians were in power.  They opposed the centralization of credit power the Bank represented and allowed the charter to lapse in 1811.  The War of 1812, however, demonstrated the handicap the Nation operated under with a fragmented financial structure.  By 1816, a second Bank of the United States was chartered to operate for 20 years.  Once more, populist political forces, under Andrew Jackson, allowed the charter to lapse.

After the demise of the Second Bank of the United States, an extended period of financial disarray and volatility marked the United States' economy.  There was no uniform currency until the American Civil War made it desirable.  Every bank issued its own notes.  There was no central source of credit; the growth of the new economy was funded through London.  Individual banks were fragile; there was no system for pooling reserves to meet banking crises.  The only defense system was a pyramid of deposits in correspondent banks that could not survive severe credit events and there were many severe "panics" through the period.  The Panic of 1907 highlighted how much the system depended upon a few individuals and how precarious such a situation could be.

Republican Senator Nelson Aldrich had been an advocate for minor changes in the National Banking Act (1864) as constituting all that was needed to repair the system.  Through the efforts of Paul Warburg, however, he began to see the need for a European style central bank.  In the new approach, a system of pooled reserves would be available among a large group of banks to stave off bank runs or other temporary stresses that could lead to larger panics if not checked.  Aldrich, unfortunately, represented the "old Guard" and, as such, his efforts to bring it about were suspect.  The split in the Republicans and the election of Woodrow Wilson brought a fresh complication.

Through all of this, the term "central bank" was a forbidden concept, particularly among the Democrats and the Populists.  (Bryan was still a major leader of the Democrats and Wilson would have to keep him on side.)  A central bank was feared to be a tool for powerful Eastern interests to control the economy.  And, among the Eastern bankers, generally Republicans, there was little enthusiasm for a government-managed bank that might encroach on their practices.  

In the end, the issue came down to who was the proper manager of "money" under its possible definitions. Bankers felt that money was a creation of the financial system and that the central bank should be private.  There was a further split regarding the basis of bank credit which created money; the "real bills" doctrine came into play.  For some, bank credit should be based on discounting of commercial paper and notes related to actual trade.  Clearly, consumer credit was beyond consideration.  The other view was closer to the "Greenback" view, that is, that money was created by government fiat, although the gold standard was assumed to prevail.

The final legislative action was led by Carter Glass in the House and Robert Owen in the Senate.  The legislative struggle is covered extensively.  At points, one might even fatigue of the legislative dance, except that one is reminded of how difficult any major legislation can be.

The value, for me, in this text is that it stresses how ingrained the resistance to a central bank was in the United States despite the evidence that the financial system was weak and brittle without one.  One need only look, however, at the blogs and opinion pieces that still decry the Federal Reserve's existence to realize how easily important lessons are forgotten when the conditions that taught those lessons are addressed.

This book is generally recommended.

     

  

Hamilton's Blessing - John Steele Gordon (Walker and Co., 1997)

Ostensibly, a history of the national debt; unfortunately, the narrative devolves into a diatribe against an economic straw man and into an extended speculation about a flat tax.  A promising start that loses sight of its worthy goal. 
[336.340973]

This book begins as a needed history of the National debt.  The first half of the book explains what benefits the national debt provides and, with less detail, why it was part of Alexander Hamilton's fiscal plan for the new nation.  The author particularly likes to focus on individual incidents such as the compromise that set the capitol in Washington, DC and the assumption of many states' Revolutionary War debts.  The book then addresses the general problem of financing the young United States.  That brings in topics such as our first two central banks, the First, and Second, Bank of the United States, the difficulties caused by a taxation system reliant almost exclusively on customs duties, and the costs of Jackson's Specie Circular.  The selling of the government's debt during the Civil War and the currency adjustments in the post-War period are also well-written.   

As it shifts to the beginning of the 20th century, the narrative drifts far from an analysis of the debt.  The author discusses the income tax amendment and invests some effort in covering the differences between the corporate and personal income taxes.  Although this is an interesting topic, it is a digression from the main subject and, even worse for the book, becomes a springboard for the author to go in a new direction.  No real rational for an income tax is presented; the author doesn't acknowledge that the gathering momentum of the Prohibition movement will mean that the government will need an alternative to the alcohol excise taxes that helped fund the government.  Instead, the author becomes fixated on thinking of the graduated tax as an experiment in social engineering.  Forward from that point, questions about the debt fall to a secondary topic. 

Much of the last section of the book becomes an extended critique of Keynesian economics.  The usefulness of any observations is thrown away, however, because the author focuses on a caricature of Keynes' thought.  It is treated as a policy spending and borrowing no matter what the economic situation.   (The bibliography reveals that the author has consulted some free market economists who are unlikely to give an unbiased critique of Keynes.)  The rest is a description of the benefits of the Flat Tax, particularly as a means of avoiding what the author refers to as "social engineering" or using the tax code for progressive taxation as a means of combatting income inequality.

This book advertises itself as a history of the national debt.  In truth, with its forays into central banking and a central government with the ability to tax, it summarizes more of Hamilton's design for the United States than just the debt.  The entire plan may be Hamilton's Blessing.  If only the author had maintained focus.

The first half of the book is recommended as a useful summary.

End the Fed - Ron Paul (Grand Central Pub., 2009)

A rant by an author who does not accept the basics of banking and uses selective history to advance an argument of pure Austrian school theory.  [332.110973]  

This short book takes only a few hours to read.  To do so, however, is to waste those few hours.  If you know something about banking, money, macroeconomics, or the Federal budget process, you will not learn anything from this book.  If you do not know these things, you will not learn them here.  The more disturbing fact is that the author was the chair of the House Subcommittee on Monetary Policy and Technology.  

The book presents no logically constructed model or argument as to why the economy would be more stable without the Fed.  He generally ignores historic periods when the U.S. did not have a central bank.  His only argument is that prices have gone up since 1913 - a post hoc, ergo propter hoc argument blind to price movements before then.  He has a fascination with the Exchange Stabilization Fund, a $20 billion Treasury fund (small by the standards of the U.S. economy - the Treasury often borrows 3 to 4 times that amount in Treasury bills each week) that he suspects is being used to manipulate global markets.  A lot of the book is a string of hypotheses and conspiracies.  He opposes the use of fractional reserve banking; a concept that dates to the Renaissance. 

The book seems to be quite popular, but I have no idea why.  To read this book is to feel trapped at a family Thanksgiving dinner at which your great uncle, who has recently discovered the internet, holds forth for hours on things he has learned online.  There are too many "it could be that ..." types of assertions.  This book is for true believers who have no need of reason or facts.

This book is not recommended at any level.