In a week that the Middle East lit aflame and the world seemed on the brink of war and chaos, the Federal Reserve announced that it would begin its third round of quantitative easing (QE3) since the economic collapse of 2008. The strategy is to keep interest rates at a bare minimum and “open ended” buying of mortgage backed securities, which is intended to enlarge the amount of cash available, increase liquidity, and stimulate the economy. Most conservative and libertarian economists see this as potential inhibitor to real economic grown at best and also a dangerous flirtation with hyperinflation.
Immediately after the QE3 announcement, stocks and commodities shot up in value. This could, of course, give a short-term and hollow boost to the economy just before the November presidential election. While it is impossible to say whether or not the decision to engage in quantitative easing at this time was used for political purposes, it will most likely have at least some political effect and many Americans will see it that way.
Federal Reserve Chairman Ben Bernanke stands out as the bland but seemingly arrogant face of the America’s central bank, and he has drawn the ire of Americans who, in increasing numbers, see the Federal Reserve as an institution with too much power, too little oversight and is far from being removed from politics as the Fed was originally intended to be.Republican primary contender, Texas Gov. Rick Perry, made news earlier this year when he said of Bernanke, “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treasonous in my opinion.”
While the statement was derided by the liberal press, it was one of the few highlights of Perry’s campaign and delighted many conservatives.
Since it was enacted in 1913, at the height of the progressive era, the Federal Reserve has acted as America’s central bank, regulating the banking system, U.S. currency and acting as the lender of last resort to American banks. The Fed’s role has become increasingly important and entrenched in the American and world economic system, and its power has increased significantly, especially after the gold standard was retired in 1971.
The Federal Reserve was, until very recently, an institution that was solidly backed by both Republicans and Democrats. The major exception was Rep. Ron Paul (R.-Tex.), who has been on a 30 year plus crusade to “end the Fed” and reinstitute the gold standard or bimetallism. But now the Republican Party platform calls for an audit of the Fed, which, if successful, would be the first time it will be audited since the institution was created. The GOP platform has also called for a gold commission—last issued in the 1980’s under President Ronald Reagan—to explore whether going back to a gold standard is possible. Even Steve Forbes has examined the gold standard as of late.
A few major noted failures of the Fed in 20th Century, the current policy of seemingly printing endless amounts of money, a few scandals occurring under its watch and the increasing belief that the institution is not nearly as removed from politics as the general population thought it was, may instigate a major fight over the Fed’s function and even existence.
All these forces in play surrounding the Federal Reserve are reminiscent of the same forces that brought down America’s last central bank, the Second Bank of the United States (BUS), in 1836.
The Second Bank of the United States, located at Chestnut Street in Pennsylvania, was adopted by Congress and President James Madison in 1817. It was created with broad national support and with the blessing the Jeffersonian-Republican Party leaders that had mostly attacked the first Bank of the United States, created by George Washington and supported by the Federalist Party, as unconstitutional less than a decade before.
John Randolph of Roanoke, an Old Republican purist said that Madison “Out Hamilton’s Alexander Hamilton,” referring to the banking and centralizing policies of the nearly dead Federalist Party that was once dominated by Alexander Hamilton. The new bank got off to an inauspicious start. The first president of the Second BUS was William Jones, described thusly by the Jacksonian Era scholar in Andrew Jackson and the Bank War , “Ignorant and venal, Jones had gone through bankruptcy. As president of the new bank he proved that bankruptcy was no accident, for his actions nearly ruined the BUS during the first year of its operation.”
Williams speculated in the BUS stock and allowed his underlings to do so too; he resigned and was replaced by former Speaker of the House Langdon Cheves who tried to right the ship by calling in loans and foreclosing on mortgages. These actions, while necessary after the mismanagement and improprieties of Williams, precipitated the financial panic of 1819, sending the country into a deep recession. One of the men who nearly went bankrupt and just barely avoided debtors prison because of the panic was Andrew Jackson. Anger at the bank from Western and Southern farmers and plantation owners was directed at the “Eastern elites” that they believed caused the crisis.
Cheves retired as bank president in 1822 and Nicholas Biddle, a brilliant financier, who, like Bernanke, had ties to Princeton University—Bernanke was a tenured professor and Biddle graduated from it at 15—was appoint the third, and as fate would have it, final president.
Biddle’s biographer , Thomas Payne Govan, said of Biddle when he accepted the job as the BUS president:
He was primarily an intellectual, but his excellent mind was accompanied by a marked executive ability. In almost any other public office he would have had to move slowly, to weigh and balance rival political claims and influences, and to outwit or overcome opponents, but as president of the national bank he could formulate policies in the light of what he judged to be the real needs of the economy and to put these policies into effect without delay.
Biddle could essentially act as a dictator over the policies of the bank with little oversight or meddling, much like how Bernanke has been able to pump far more money into the economy, without legislative oversight.
Biddle deftly managed the BUS and for the most part made it a sound, but controversial institution. He was accused of and most likely guilty of allowing the state chapters of the bank to withhold loans from politicians who opposed the bank, while at the same time giving favorable loans to politicians who supported it.
President Jackson himself did not have particularly enlightened views about economics and banking. He once said to Colonel James Hamilton, the son of Alexander Hamilton, “Colonel, your father was not in favor of the bank of the United States!” James Hamilton was too shocked to respond.
Jackson was also not an ideologue when it came to central banking either, and in the early stages of his war against the bank considered reforming or destroying the current one and setting up a new bank in its place.
The real turning point in the bank war and the primary reason that it was destroyed ended up not really being about economics at all. Biddle’s arrogance, tone deafness, unwillingness to allow the bank to be modified and miscalculation of Jackson’s will and political ability did it in and the American people, who for the most part accepted the bank as a solid institution, turned against it and rallied behind Jackson.
Biddle said of the brewing political storm, “All this stir about monopolies will blow away like the vapor form a Steam Boat as soon as the question gets fairly under way.” In his first term, Jackson requested that Biddle investigate state chapters of the BUS that had been accused of corruption, which in many cases was occurring. Biddle solved the issue internally, but stonewalled Congressional investigators from looking into it further.
Then at the end of Jackson’s first term, Biddle along with National Republican leaders that stood for the BUS and against Jackson, most notably Kentucky Senator Henry Clay who would challenge Jackson in the 1832 presidential election, decided to pass a bill to reauthorize the bank, years before it was necessary. This was a political move to give Clay something to run on and to give the bank a chance to become a more permanent institution.
In the Senate, Thomas Hart Benton of Missouri, nicknamed “Old Bullion” for his hard money views, said in a speech, “The bank is in the field, a combatant, and a fearful and tremendous one, in the presidential election. If she succeeds there is an end of American liberty—an end of the republic.”
Jackson didn’t budge and issued one on the most famous vetoes in American history. Jackson said in his veto message, “The bank of the United States is in many respects convenient for the government and useful to the people… I sincerely regret that in the act before me I can perceive none of those modifications of the bank charter which are necessary, in my opinion, to make it compatible with justice, with sound policy, or with the Constitution of our country.”
The bank was a wounded, dying animal and soon Jackson would put it out of its misery. Biddle tried to throw the country into economic crisis by curtailing the loans issued, but it wasn’t enough to deter Jackson. After going through several uncooperative treasury secretaries he found one in Roger Taney that would remove the government deposits from the BUS, severing its connection to the federal government.
The BUS survived on its own for a few years before entirely collapsing in 1840, during a recession that may or may not have been caused by the destruction of the bank, the best evidence of the cause points to other factors. Biddle was so unpopular in America that at the time of his death in 1844, Democratic members of the press, “jeered him as he entered the grave,” according to historian Robert Remini.
The forces that coalesced and factors surrounding the destruction of the Second Bank of the United States are at work now with the current Federal Reserve. A powerful central bank with broad, bipartisan support has suddenly come under intense scrutiny and pressure. The lack of oversight and dismissal of corruption charges only add fuel to the fire of Americans that distrust large financial institutions. The total lack of restraint from Chairman Bernanke and the appearance of politicking will intensify the anger from opponents and the addition of the Consumer Protection Financial Bureau makes it all the more capable of exerting vast power and widespread abuse.
The Federal Reserve has been put on warning like the Second Bank of the United States was in the late 1820’s.