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To understand why Rick Perry this week picked a fight with Ben Bernanke and why media pariah Ron Paul continues to attract a cult following, it helps to know what happened on the evening of June 20, 1790 at a New York dinner party.
Thomas Jefferson, fresh from his stint as American minister to France, had the day before literally bumped into Alexander Hamilton, who looked “somb[er], haggard, and dejected beyond comparison,” according to the future President’s writings.
Fair enough; the young treasury secretary had a lot on his mind. Hamilton wanted the restructuring of states’ debts and a fiscal union — which has a contemporaneous echo, as FT Alphaville’s Joseph Cotterill noted 221 years later.
Jefferson and his fellow Virginian James Madison were less keen. Nevertheless, a deal was struck — Hamilton got enough votes for his fiscal union, while the Commonwealth received a $1.5m tax break and an agreement for the US capital city to be located on the banks of the Potomac.
As with a more recent political dinner across the pond, the details and the importance of Jefferson’s shindig are disputed.
No matter. The pertinent point is that the agreement allowed Hamilton to turn his considerable energies to creating the Bank of the United States, with a monopoly over fiat currency and the support of north eastern financiers. A mix of Scottish Enlightenment ideas and Bank of England practice, the new central bank, argued Hamilton, was necessary for “the future exigencies of government”.
Jefferson, following what he later called the worst mistake of his career, was left to advocate an alternative view of central banking and political economy: one that exalted labour above capital; countryside above city; French thought above English and Scottish. “Those who labour in the earth are the chosen of God," wrote Jefferson, a few years before the dinner party. For him, the “First Bank” was unconstitutional and would undermine state banks.
Crudely, these two narrative threads — Hamiltonian and Jeffersonian — spooled out over two centuries and continue to shape the way America sees central banking. The Hamilton view has generally been that of the Establishment (to borrow a British term) — centralised power, paper credit, tight-ish money, and close ties with rich financiers.
The alternative view was dominant for much of the nineteenth century, dormant for much of the twentieth century and, though mutated and muted, is embodied today in the likes of Perry and Paul.
Simon Schama’s delicious 2009 essay on American banking describes how President Andrew Jackson, with “his pompadour as the insignia of a free frontier spirit”, adapted Jefferson’s bankophobia to tap “into a pulsing vein of American insecurity about the moral character of money.”
Like Jefferson, who in almost every other respect was a more sophisticated mind, Jackson came to believe paper money at best an unreliable creature of financial whim (those depending on it never sure how much it might be discounted), and at worst the choice tool of a conspiracy to enslave through debt. Silver coin had circulated through the country both before and after independence, and Jackson, as authentically populist as his campaign advertising, preferred, for transactions, something on which one could bite.
Jackson successfully fought the 1832 election on a promise to end the Second Bank of the United States. “The Bank is trying to kill me but I will kill it!” he railed, vowing to veto its charter. In the end, Jackson’s veto nearly killed the country. Speculation reigned; 1837 saw a new President, Martin van Buren, blamed for a speculation-fuelled depression caused by the failed policies of his predecessor.
By the eve of the civil war there were 7,000 local currencies circulating in the republic. Counterfeiting was rife in a nation replete with monetary anarchy. Again it required war for the centralised state to regain control; Abraham Lincoln's Banking Act of 1862 restored some sense or order.
But Jackson’s ideas did not disappear with the Union victory. A central bank that could make "money plenty or scarce at its pleasure", was a "despotic sway" over "men who love liberty and desire nothing but equal rights and equal laws", "the agricultural, mechanical and labouring classes of society". (Quotes taken from Schama’s essay.)
Indeed, come 1896, with agricultural prices depressed and silver lodes recently discovered, the populist, rural (and let’s not forget white and male) workers were once again gunning for the supporters of the monetary status quo. They had a champion, too: William Jennings Bryan.
These days, especially among non-Americans, Bryan is perhaps best known as the sweaty crank of a lawyer who represented Tennessee in the Scopes trial. After his defence of creationism, he became a mocked caricature, a sweaty possessor of avoirdupois, bereft of bombast. In Hemingway’s The Sun Also Rises, published two years after the trial, news of Bryan’s death is treated satirically. Jake and his friend Bill are sitting near a river, drinking (obviously) and preparing lunch:
We unwrapped the little parcels of lunch.
"Find any salt?"
"First the egg," said Bill.
"Then the chicken. Even Bryan could see that."
"He’s dead. I read it in the paper yesterday."
"No. Not really?
“Yes, Bryan’s dead.”
Bill laid down the egg he was peeling.
“I reverse the order. For Bryan’s sake. As a tribute to the Great Commoner. First the chicken; then the egg.”
Yet the Great Commoner had once been the most exciting force in US politics and arguably the greatest orator of the 19th century. The FT’s US news editor Gary Silverman earlier this week reminded us of Bryan’s famous speech at the 1896 Democratic convention. A read of the text reveals the stickiness of the Jefferson-Jackson monetary narrative, and, when looked at upside down, foreshadows current Republican criticisms of the Fed.
The speech came amid rising anger in the heartlands at the deflationary environment ostensibly encouraged by the gold standard. As Greg Mankiw explains in his introductory economics textbook, “This deflation was good for creditors, primarily the bankers of the Northeast, but it was bad for debtors, primarily the farmers of the South and West.” The (white) rural poor wanted a move to “Free Silver”, a bimetallic standard, under which both gold and silver could be minted into coin. Hey presto, the money supply would increase, deflation would end, farm prices would rise, and everything would be sweet as a nut.
If you haven’t read Bryan’s 1896 speech, we recommend you do so. It’s smart, passionate and features perhaps the most powerful peroration in the American canon:
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world. Having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them, you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.
According to Michael Kazin’s largely sympathetic biography of Bryan, the crowd — left bored by soundbites from goldbug Democrats — then went bonkers, and this enthusiasm carried Bryan to the nomination. He lost, of course, and lost again in 1900, then again in 1908.
(There’s a droll sketch in Gore Vidal’s American Sissy essay on Teddy Roosevelt in which the author’s grandfather explains his support for Bryan in 1908: “‘After I nominated him at Denver, we rode back to the hotel in the same carriage and he turned to me and said, ‘You know, I base my political success on just three things.’ The old man paused for dramatic effect. What were they? I asked. ‘I’ve completely forgotten,’ he said. ‘But I do remember wondering why he thought he was a success.’”)
Bryan was a racist, a fundamentalist Christian and his bimetallism idea was the economic equivalent of treating club foot with a pedicure. Yet his resentment at the concentrated power of American finance and his mistrust of those in charge of the currency continues.
It’s just that the threads seem to have gotten a little tangled in the last 100 years or so. One can of course still hear the echoes of the cadences of Jefferson, Jackson and Bryan in the speeches of FDR, Johnson and Obama. But, perhaps due to the rewiring of the Democratic Party in the 1960s, an iconoclastic view of monetary policy among so-called progressives has all but disappeared.
In its place today one finds the anti-Fed sentiment of Republican presidential candidates. In some ways, Rick Perry and Ron Paul are the true inheritors of Bryan’s legacy. There are important differences between the two and, of course, between them and Bryan. One of the ironies is that they’re now demanding tight money rather than loose money. But both Perry and Paul profess to represent the heartlands, desire to see the Fed abolished or its chair tried for treason, proclaim states rights, and have fervent fan bases made up of people who deeply distrust the federal government.
We don’t agree with their economic prescriptions. But to fob them off as part of a lunatic fringe is patronising, incurious and ignorant. Ezra Klein did not do this, noting that “the GOP’s turn against monetary policy is one of the most consequential and underdiscussed trends in economic policy.” Agreed. And what this look back also reminded us was that today’s so-called progressives have really very little to say about monetary policy, at least compared to the swathes of column inches spent on fiscal policy.
Sure, this is largely to do with a solemn belief in the importance of Fed independence. But that’s no excuse for at least getting one’s head around how it works and thinking about whether reforms at least in the margins (targeting, mandate changing, accountability, etc.) are sensible. Some are starting to correct this imbalance. And we guess having no thoughts on the Fed is also an ideology of sorts in this context. (Those advocating Modern Monetary Theory may pipe up here, too.)
If nothing else, it might provide something to discuss at the next dinner party.
Related links: America's phobia of banks – Simon Schama (FT, 2009) A Short Banking History of the United States – John Steele Gordon (WSJ, 2008) Whoopers and Shouters – James Morone (LRB, 2008) The Wizard of Oz as Monetary Allegory – Journal of Political Economy (1990)
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