Banks Will Do As Banks Always Do, As Will Politicians
Just eight days after being released from Leavenworth Federal Penitentiary, John Walsh died. It was an inglorious end to an often spectacular Midwest bank career. Walsh had been the major shareholder and president of Chicago National Bank. Following its failure in 1905, he was convicted on January 20, 1908, for misapplication of funds and sentenced to five years. He was released from prison on October 23, 1911.
Mr. Walsh had been shown to have fraudulently issued bank call reports. Chicago National had been loaning funds to institutions and persons close to Walsh, and it was his intent to hide the practice not just for financial reasons. Among those connections to the bank were the Dawes brothers, Charles and Rufus.
These two had in 1895 obtained control of the Northwestern Gas Light and Coke Company. As Chicago was a rapidly growing metropolis, this one company was situated for development of services into suburban regions. Expanding along the North Shore, the Dawes boys purchased several gas companies along the way to fold into their plans.
Financing those transactions was Chicago National. They took in other investors, of course, but the bulk of funding was supplied by John Walsh’s bank. Charles Dawes had in fact been partner with Walsh in Northwestern, a fact which neither man wished to make public. They also partnered in 1896 with William McKinley’s successful Presidential campaign.
That was for Walsh a big deal. He had been a lifelong Democrat but had turned against the party’s radical embrace of free silver. William Jennings Bryan brought forth the silver question after decades of so-called agitation. Having become a successful banker and outwardly businessmen with significant ties to major financial players, these Chicago men had little interest in Bryan’s way of thinking. To defeat it, they raised substantial sums for McKinley’s effort.
It was perhaps bitter irony for Bryan. Charles Dawes had come from Lincoln, Nebraska, first, and had only resettled in Chicago after the 1893 panic. Opening a law office there on behalf of former Ohio Governor Rufus Walton, that same year Bryan rented space for his new law practice in the same building. They attended the same Sunday church services, the same Wednesday prayer meetings, and even lived only two houses apart.
After the Democrat’s defeat in the 1896 election, Charles Dawes was made Comptroller of the Currency despite being only 31 years of age. Before the Federal Reserve, OCC was the top bank regulator of national banks. That meant, because Chicago National was just such a bank, Dawes was now the chief examiner of John Walsh’s institution.
They remained partners regardless, using Chicago National to continue financing Northwestern despite the latter’s inability to turn much profit. In 1897, Walsh purchased Charles’ share of Akron Gas Light Company, and continued to use Chicago National and two of its affiliates as sources of funds for Dawes’ business interests even after he had left the Treasury Department in 1901 (running unsuccessfully for a US Senate seat from Illinois).
The three banks collapsed in 1905 after a depositor run triggered by difficulties at Northwestern. Though the trio had deposit liabilities of $25 million, Walsh had been accused of misapplying a staggering $14 million of them in these various interconnected schemes.
It was not uncommon for this sort of thing to happen, though the scale to which it was done here was. The man who replaced Charles Dawes as Comptroller, William Barret Ridgely, remarked at Chicago National’s fate, “There is seldom a failure which is not due to excessive loans, either directly to the officers or to various concerns in which they are in some way interested.”
Ridgely, as it turned out, was alleged to have known about the tangled connections between Walsh, Charles and Rufus Dawes, and other members of this Chicago syndicate. He had been a partner with the Dawes brothers on several of their gas company acquisitions, too. Corruption is never specific to a single era.
John Walsh was left to take the fall, indicted by a grand jury and sent to federal trial. One of the witnesses appearing at that trial was George M. Coffin. According to a New York Times article from January 4, 1908, Coffin testified for the defense that it was common practice throughout the national bank system for banks to make excessive loans of a similar nature to those found on the books of Chicago National.
George Mathewes Coffin was by 1908 America’s foremost expert on banking and money. He had started in the office of Comptroller at the Treasury Department in 1886 as nothing more than a teller. In only a few months, he was promoted to chief of the issue division and in 1888 had been made head of the division of reports. That meant he was the nation’s chief supervisor of all bank examiners’ inspections (national banks).
Though he had been appointed as a Democrat under Grover Cleveland, Coffin was the only division chief retained when Republican Benjamin Harrison assumed the Presidency in 1889. He was eventually promoted to Deputy Comptroller, a noted achievement being the first time that office had ever been filled by promotion rather than political appointment. He left in 1898.
John Walsh’s defense attorney John S. Miller asked former Deputy Comptroller Coffin if it was typical for national banks that had made loans in excess of limits to have their cases forwarded to the Comptroller. Coffin answered yes.
He then testified the Comptroller offered no special criticism of the practice to individual violators. Instead, “The reports were gone over and then printed letters calling the attention of the banks to the statutes were sent to the banks.” Despite this result, Coffin told the court that the loan issue continued to prevail anyway. “Yes, there were always about one-third of banks making such loans.”
These were not mere bureaucratic letters, either. They were “formal and perfunctory, signed with autograph stamps and containing directions regarding the reduction of excessive loans.” It didn’t matter, however, as Coffin stated they were never followed up on nor were banks ever obligated to reply to them – even to acknowledge they had been received.
What condemned John Walsh to prison, however, was that though he had been making use of a widespread if illegal bank practice, the way in which he carried it out was outright fraud. Walsh had been forging the names and signatures of other bank officials without their knowledge to cover up who it was receiving any funds.
Still, Assistant District Attorney Fletcher Dobyns wanted to know if there was any way in which even sham excess loans could be limited. George Coffin replied, “That depended more on the amount of deposits than the amount of capital.”
What constrained any bank at that time was actual money. National banks since the Greenback era of the Civil War, the national emergency that brought national banks into existence, had been authorized to back their assets with government bonds rather than specifically specie. Even then, however, cash was king.
But the period between the Civil War and the Panic of 1893 had been one of monetary evolution. Silver coins had been a major staple of the American economy from the days before there was a United States. Following that War, they had largely disappeared from circulation. Left in their place was a gold standard alone almost by default.
This was the “crime” to which William Jennings Bryan had ridden to the first two (1896, 1900) of his three (he was also nominated in 1908) Democratic Presidential nominations. Representing the South and Midwest largely farming economies, these silver populists accused bankers of misappropriating a gold standard to the direct harm of indebted farmers. This “cross of gold” was, they claimed, responsible for the devastating price deflation ravaging their communities.
Not so, many bankers responded. Among the more forceful voices in opposition to Bryan was George Coffin. In 1895, he wrote and published a powerful rejoinder made so by his well-earned reputation. Titled Silver and Common Sense, he completely dismantled the main points of the silver argument just before the all-important 1896 election.
From his position within the Comptrollers office, Coffin had unparalleled access to monetary and banking checks. Major money statistics were practically nil at the time, so what information Coffin could compile was definitive.
He had shown that between 1851 and 1873, silver production had been $1.19 billion. From 1874 to 1891, it nearly doubled to $2.03 billion, while an additional $601 million was added in the years 1892, 1893, and 1984.
Even with that huge increase in production, silver coins in actual circulation plummeted. Coffin wrote, “…that out of the large amount of 423,000,000 silver dollars coined since 1878 only about 53,000,000 of these pieces are now in actual circulation amongst the people, the balance all being held by the Government chiefly on deposit for the people who hold paper certificates for the silver dollars.”
Before the sharp increase in silver production, gold was mined far more heavily in relation. Thus, a silver dollar (officially determined to be coined in a ratio of 16 to 1 silver to gold content) that had been given a market price of 101 cents in 1849 (gold rush) had risen to 105 cents by 1859. It was still at a slight premium, 100.46 cents, in 1873 but averaged just 81 cents (according to Coffin’s numbers) from 1874 to 1891 as silver production doubled, and only 53 cents in the three years following.
“As the Government will deliver silver dollars free of freight charges anywhere in the United States, if the people want them and prefer them to other money why do they not take them?”
What we call Godwin’s Law today was responsible for all the silver ended up in bullion at the Treasury Department. Coinage laws forced the government to buy up silver regardless of actual demand at 16 to 1, so Americans simply disposed of their silver upon the feds and never took the coins back.
Agricultural price deflation was misattributed to widespread preference for gold and the apparent scarcity of silver in circulation. What the populists claimed was monetary deflation was instead the productive advance of industrialization.
“Again, it is stated by the advocates of free silver coinage that prices of products are low because money is scarce, but this is not true, for the amount of money in circulation per capita in the United States has almost steadily increased from $18 per capita in 1873 to over $24 per capita in 1894, as official statistics conclusively show, and yet the prices of products have steadily decreased during the same period; so this contention cannot be true, and, as already states, the decline in prices has been almost entirely due to the action of the law of supply and demand affected by labor-saving devices and not the volume of money.”
Proponents of the current level of globalization would have you believe we are in the same sort of situation. Populist resentment, they say, is akin to Bryan’s silver agitation, an unfounded complaint against nothing less than the laws of economics. No economy ever stands still, and in free market capitalism there will always be mess.
That much is true, as is monetary evolution. George Coffin wrote that the primary use of silver coins for low denomination commerce was itself an evolution, taking over for other base metals first iron then copper then silver. That forward progress in money had been a primary step to the industrial revolution and what that meant more good than bad.
“As an illustration, it has been computed that iron nails are now so cheap that if a carpenter drops every other nail while he is working, the labor cost of his time in picking them up would exceed the cost of nails dropped.”
There is no doubt something like that has happened over the last fifty years. Many goods have become cheaper than anyone could have imagined, and more than just technology or computers. Globalization in combination with innovation has produced a great many indisputable positives. The question is whether they were enough as they were a century ago.
In contrast to the 1896 election, the 2016 version suggests maybe not. McKinley first won a close and heavily contested election (271 to 176, carrying 23 states to Bryan’s 22) before winning more handily the second time (292 to 155, carrying 28 states to Bryan’s 17). Donald Trump won under similar circumstances (304 to 227, carrying 30 states to Clinton’s 20 plus DC), but unlike McKinley his was closer to Bryan’s position of populism.
That understates the level of disenchantment, too. Hillary Clinton ran against another populist in the nomination undercard. Running as a Democrat, Bernie Sanders championed largely the same problems as Trump (though I doubt supporters of either would ever agree on that) speaking to them from very different points of view. In several very telling moments to that effect, each at separate times called the unemployment rate some variation of fake.
Sanders isn’t yet finished, either. Perhaps looking toward 2020, he is still championing populist ideals. Just this week he unveiled an unfinished plan to provide all Americans with a guaranteed $15 per hour job that includes health insurance. The missing pieces are, incredibly, what exactly these people would do at these government jobs and far more important just how much all this might cost.
Ostensibly this would force the private sector to raise wages with no parallel increase in productivity or profitability (Keynesians would certainly disagree for any positive effects on “aggregate demand”, though they’ve spent an entire decade focused on aggregate demand and its gone nowhere despite considerable and sustained effort to the contrary). It attacks the symptom, like Bryan, without properly identifying the cause (nor delivering a sane solution).
This is the problem for the second decade of the 21st century. There are no George Coffin’s anymore to set the record straight. Strange as it is to hear, what the current economic situation in the United States requires is for Deutsche Bank to be able to make more money in bond trading. A lot more.
The intuitive leap from silver to gold to the Industrial Revolution was much easier to make. Even if you hated the backroom criminal dealings of bankers like John Walsh and the sleazy cronyism with government officials, Democrat as well as Republican (Charles Dawes would go on to become Vice President to Calvin Coolidge), the depositor still mattered the most at the top of the economic ticket. Money was external. Corruption is universal.
Everything has been upended owing largely to the Great Depression and ironically top-down attempts to make sure it was never repeated. Banks were given priority through the eurodollar system’s massively evolved chains of liabilities. Money can no longer be defined (any official admission to that effect doesn’t ever make it out into the public, but it’s there many times in private) but “something” out there undertakes its various roles. In the seventies it was termed “missing money” but by the eighties authorities just gave up looking for it.
Given that bank liabilities are the substance, if however indeterminate, then the bank is what matters. Seeing as the system broke nearly eleven years ago, we are stuck with it until it is replaced. Unlike the election of 1896, no one is calling for even an evaluation along those lines. Despite all that’s happened since a global financial panic, it still hasn’t been appreciated as a global financial panic and what that really means.
So, either Deutsche Bank makes more money in “bond trading” (which is nothing more than a euphemism for the vast array of money dealing activities that flow through that specific part of an institution’s income statement) or the populist often socialist ideals will become more acceptable – and radical.
Fox Business Channel Host Stuart Varney sat down on another FoxNews Show earlier this week and lamented, “Suddenly I find that socialism is back in favor in America.”
“I left England in the 1970s. And I left because it was a socialist economy which offered no hope for anybody who wanted to climb the food chain. Mass unemployment. Absolutely low growth. It was a terrible place back in the 1970s and I left. I came to America.”
As former Federal Reserve Vice Chairman Alice Rivlin observed last year, “we haven’t seen 3% growth for a long time.” How can that be? No one seems able to guess. Varney incorrectly blamed President Obama. Economists have tried for a decade to come up with something, only to now suggest that it must not really matter (their “full employment”) since so much time has passed.
We are the 1970’s, only worse. During the Great Inflation like the late Gilded Age, it was more evident what was wrong. In the late 19th century, it was capitalist progress that was entirely messy. It was pretty straightforward to identify silver as a distraction. During the seventies, it was Economists at central banks and working in Finance Ministries who didn’t have the first clue. No one needed an advanced degree to figure out inflation (it was actually better that you didn’t have one).
Deutsche Bank, by the way, just two weeks ago fired yet another CEO. The last one, John Cryan, was dismissed because he was right. The bank’s balance sheet remains an impenetrable mess for all the excesses of the apex of the eurodollar, bubble era. That’s exactly what Cryan identified at the beginning of his tenure. He tried to correct it, but tellingly he couldn’t.
DB is among the more extreme cases, but it is no outlier. No matter what era, banks will do what banks always do and politicians will try to do what politicians always try to do. The difference is entangling money within all of them. Fix the monetary system this time for that defect, or make sure Deutsche Bank can make crazy profits. Doing neither means more just plain crazy.
