Given the enormous losses during the country’s recent fiscal meltdown that cost Americans twenty trillion public dollars, their jobs and their homes, it might seem curious that few elected officials in Washington have spoken critically or demanded an investigation regarding the Federal Reserve Bank’s role in the debacle. While the silence has been deafening, such a blackout of opinion on the country’s economic fortunes has not always been the case.
Since Article I, Section 8 of the U.S. Constitution gives Congress the power to “coin and regulate the value of money,” the Congressional decision in 1791 to delegate that responsibility to a central bank has been fraught with controversy, opposition and charges of corruption ever since.
The First Bank of the United States was chartered for a twenty year period to pay revolutionary war debts and consolidate state currencies and financial policies. Thomas Jefferson believed that a central bank was not authorized by the Constitution and that such a financial institution would benefit the privileged and wealthy and be adverse to the interests of democracy and the common people.
By 1811 with fraud and corruption rampant, President James Madison allowed the First Bank charter to expire after Congress, citing a ‘paradise for speculators,” failed to continue the Bank by one vote. Madison saw the Bank as favoring business institutions while ignoring the country’s agricultural needs. However, unable to finance the country due to inflation caused by funding the War of 1812, Madison succumbed to renewal in 1816 for another twenty years .
As the country’s agriculture sector boomed, the Second Bank of the United States encouraged widespread loans to land speculators creating an economic bubble which resulted in the Panic of 1819.
Elected as a fierce opponent of a monopolistic central bank, President Andrew Jackson (1829 – 1837) issued an Executive Order transferring the deposit of government funds to state banks. Unperturbed by a censure from the Senate, Jackson allowed the Bank’s charter to expire in 1836 As astute as Jefferson and Madison, Jackson saw the Bank as concentrating financial strength in one institution while improving the fortunes of an ‘elite circle’ at the expense of farmers and workers. He feared that the Bank exposed the government to foreign interests, fed the fever of credit and speculation and exercised too much control over Congress. To his enduring credit, Jackson became the only President to pay off the national debt.
Even after the speculative Panic of 1837, President John Tyler Jr., (1841 – 1845), a strict Constitutionalist and opponent of a central bank while in the Senate, vetoed two attempts by Congress to charter a second central bank. Tyler’s reward for standing firm was censure by the Senate, resignation of all but one of his Cabinet and expulsion from the Whig party. Tyler became one of three Presidents to serve in office with no party affiliation as outraged Whig party loyalists protested outside the White House.
After a series of financial crises that culminated with the Panic of 1907, the justification again existed for a centralized bank to bring financial stability and control to the U.S. economy. The Federal Reserve Act of 1913 was adopted establishing a quasi-governmental Federal Reserve system known today as the Fed Bank.
Despite a new central bank, sixteen years later, the stock market crashed ushering in the Great Depression which ushered in the Glass-Steagall Act of 1933 which provided relative economic stability until President Clinton signed a Congressional bi-partisan repeal in 1999 which, in part, ushered in the 2008 fiscal meltdown.
While embedded tradition dictates that Fed Bank ‘independence’ be immune from politics, former Chair Greenspan set a double standard by freely manipulating and ‘coaching’ members of Congress and Administration personnel. Presumably, Bernanke has continued Greenspan’s time – honored behavior.
Given the prescient predictions of 150 and 200 years ago, words that echo back to us over the centuries, today’s elected representatives are, by comparison, too often like deer caught in the headlights unsure of which way to go, too eager to acquiesce their fiduciary responsibility to an unelected entity, too willing to take a pass on real oversight and accountability and unlike their predecessors, too willing to sit down and shut up.