The Role of the Centralization of Banking Power in Increasing the Severity of Panics

The banking panics of the Gilded Age were caused by the vast power of New York City banks to control the economy through control of the money and credit supply. These were symptoms of the National Banking System that had existed since the Civil War. Due to federal legislation, interior banks could only earn interest on their reserves by depositing them with larger national banks in New York City. When planting season arrived and the farmers needed credit, the interior banks would rely on the New York City banks to return their deposits and provide them with liquidity. This gave the New York City banks power over a large percent of the nation's capital, which gave them the opportunity to exert tremendous influence over the stock market and play speculative games for profit. During panics, these irresponsible investments would come to light, and the New York City banks would be unable to provide money to the interior banks. This would cause a contraction of the money supply throughout the whole country, which would decrease employment, prices, and investment. The rigid gold standard made these panics even worse because it did not allow for sufficient expansion of the money supply during times when the demand for credit was high. Nevertheless, there were many methods of providing liquidity during crises which effectively reduced the severity of these panics. The US Treasury, for example, would buy bonds back early and make deposits to shore up the reserves of shaky financial institutions. In addition, the actions of the New York Clearing House (NYCH) strongly affected the severity of the banking panics of the Gilded Age. The movements for banking reform in the early 1900s were strongly motivated by the need for a more elastic currency, but the reform movement did not attack the gold standard for constricting the money supply, and it did not attack the National Banking System for centralizing banking power in New York. Mainly spearheaded by big bankers, the reform movement instead fought for centralized coordination of banking power to create this much needed elasticity, and the Federal Reserve System replaced the National Banking System in 1913. Pooling gold and reserves in a central bank would reduce transactions costs, make it easier to expand and contract the money supply in reaction to the market, and create a system which was not biased against interior banks, but it would also lead to uniformity in the economy rather than diversity and centralized control of the economic fate of the nation.

The National Banking System had already increased the severity of the panics of the Gilded Age by concentrating banking power in New York City, yet the banking reform movement further centralized banking power by enacting the Federal Reserve System. In the National Banking system, rural banks had to keep their reserves in city banks if they wanted to earn interest, and city banks had to keep their reserves in New York City banks in order to earn interest. The New York bankers would use the interior banks' deposits to invest in the stock market, attempting to use their massive power over other people's money to affect market trends for speculative profit. If the New York banks had over-invested and could not meet the volatile credit demands of the interior banks, there was the danger of a panic. Louis Brandeis demonized JP Morgan and the New York Money Trust, claiming that “a main cause of these large fortunes is the huge toll taken by those who control the avenues to capital and to investors.” Brandeis recognized that the bankers in New York were using their control of credit for personal gain, and he endorsed legislation to make their activities and profits transparent to the public. Brandeis encouraged states to act as their own banks in order to cut out the middlemen, but government intervention would actually increase the power of the Money Trust. Some have argued that the Money Trust was quite incapable of controlling competition through their management of credit before the Federal Reserve System, and that the banking reform movement was the big bankers' reaction to the decentralization of power which was the trend after the mergers of 1901.¹

The increased power of the federal government over banking which came with the passage of the Federal Reserve Act simply increased the power of the big banks, since they could control legislation most easily at the federal level. The big bankers had most strongly supported the Aldrich Bill, which proposed the creation of a National Reserve Association run by bankers to issue the country's currency, set interest rates, and centrally regulate the whole country's money supply. Since the Aldrich Bill had given bankers the responsibility of choosing the managers of the central bank, it evoked much public criticism, and the Glass-Owen Bill would ultimately pass as the Federal Reserve Act under Wilson. While the Glass-Owen Bill gave more control of the Federal Reserve System to political appointees, it was similar to the Aldrich Bill in that it still created a central bank to coordinate the nation's access to credit, and "in certain spots even the language of the two bills was identical." The power of New York bankers had begun to decrease after the 1890s, and the banking reform effort which created the Federal Reserve System was meant to offset the decentralization of banking power. In fact, the Glass-Own Bill centralized banking power even further than the Aldrich Bill had proposed to, enacting national rather than regional control. Aldrich though that the Glass-Owen Bill would “be the first and most important step toward changing our form of government from a democracy to an autocracy,” making it clear that the Federal Reserve Board would determine the entire nation's livelihood. Ben Bernanke agreed with Milton Friedman's assessment that the Federal Reserve Board's irresponsible decisions in setting the interest rate exacerbated the Great Depression, and he promised it would never happen again, but why didn't he criticize the structural issues which give so much monopolistic power to one governing board, how can he vouch for the future chairmen? While the Federal Reserve Act would dismantle the National Banking System's pyramidal structure and level interest rates to the benefit of the South and West, its greatest advantage would be its ability to expand and contract the money supply based on the needs of the market. It would be impossible for the central planners to detect the needs of the market, however, because nobody, not even elected experts, can predict the future, and the flexibility and adaptability of money markets under free banking is preferable to the minor reduction in transactions costs achieved under central banking.²

While it would be easier to control the money supply under the Federal Reserve System, there were already a variety of methods which had provided for monetary expansion during crises. Clearing houses emerged as a simple way for banks to clear checks but they soon began to take on the functions of a lender of last resort. The panic of 1873 was solved quickly because the New York banks had pooled their reserves in the NYCH and had sufficient access to money and credit. The panics of 1884 and 1890 (I know what you're saying: what panics?) were ameliorated by the use of clearing house loan certificates, which acted as an internal currency for bankers and freed up money for public circulation. Benjamin Tucker's Liberty, a contemporary magazine, had recognized that these clearing house certificates were so effective because they had increased the money supply with currency that was not redeemable in gold. These certificates were not allowed to circulate among the public because the federal government would levy a ten percent tax on these notes and indirectly prohibit them. While Brandeis recognized that the federal government was taxing private and state bank notes out of existence, he did not consider the malicious effect this had on restricting credit when it was in high demand. In addition to the reserve pooling and the loan certificates of the clearing house, elasticity was also provided by the US Treasury, which “would often shift gold and currency to different regions” in order to provide credit where it was needed the most. During the Panic of 1907, Roosevelt's Treasury would provide credit to banks without any guidelines about how to spend it, using public money to insulate the bankers from their monetary mismanagement. The actions of the clearing houses and the US Treasury in expanding the money supply determined the severity of the panics of the Gilded Age, and the failure of the NYCH in ameliorating the Panic of 1907 can be seen as the catalyst which drove the banking establishment to clamor for a public lender of last resort.³

The devastating Panic of 1907 was so destructive because the NYCH, the traditional lender of last resort, refused to save the Knickerbocker Trust. There had not been a clearing house for the trusts, even though they carried out many of the same functions as banks, and the NYCH did not want to take responsibility for this one. The closure of Mercantile Bank, which had occurred due to a failed attempt to corner the market on United Copper Company stock, caused the subsequent failure of other banks which endangered the liquidity of Knickerbocker Trust. Even though there were adequate reserves, the NYCH had suspended cash payments to depositors for three weeks, and this only drove to worsen the panic. In addition, the NYCH refused to use loan certificates to increase the supply of credit during this severe crisis. The Knickerbocker Trust was finally saved when JP Morgan personally provided a loan, using its securities and assets as collateral. With the support of US Treasury deposits, Morgan was able to pool enough money to shore up the Knickerbocker Trust and prevent further bank runs and failures. The refusal of the NYCH to cooperate with the banks and expand the money supply increased the severity of the panic to such an extent that people began to look to the government to provide clearing house services for the banking industry.⁴

Bankers understood that severe panics could be avoided if the money supply could expand and contract based on the needs of the market. The National Banking System had caused such a concentration of money in the hands of New York bankers that the entire economy of the nation was reliant on the cash reserves in New York, which fluctuated radically based on the stock market trends. This inextricably tied the fate of the interior banks to the fate of the New York banks. Essentially, such a large amount of resources were under the control of so few banks that failure became an impossible option for the larger banks and trusts. In light of the centralized coordination of so much money, certain institutions became so large and essential that only the government could provide the guarantee that the bankers were looking for. A Federal Reserve System could be beneficial because it would be easier to expand and contract the money supply when necessary, but the fate of America's economy would be completely reliant on the wisdom of the Federal Reserve Board's decisions. These central planners would need to be able to predict future market trends in order to know exactly when to expand and contract the money supply for the benefit of the public interest. If the interest rates were set too low during periods of over-investment, a recession would be caused by the liquidation of these bad investments, and if the interest rates were set too high during recessions, there would not be enough credit to maintain price levels and employment. The Federal Reserve System, which mandates that the whole country's interest rate is to be set by one monopolistic governing board, does not allow for individual choice or secession, and this is a problem because the fear of losing customers to competition is the most effective check on irresponsible management. Without competition, public oversight is the only method of ensuring that the central planners are at least trying to act in the public interest, but the Fed's activities are not even transparent to the public! Even if we gain the right to audit the Fed, this will be insufficient because the uniformity of policy and the lack of diverse experimentation will still remain, and this deprives us from essential information which allows us to understand what is in our interest. In conjunction with the US Treasury, clearing houses were already providing the liquidity that was needed to protect the nation from panics and recessions. This kept the panics of the Gilded Age contained and small in comparison to later recessions. To solve the remaining elasticity problems, the reform should have focused on eliminating the ten percent tax on private and state-chartered bank notes to increase the flexibility of the money supply. In addition, the gold standard should have been lifted to allow money to be created with any sort of asset as collateral. Instead, big bankers guided reform to increase rather than decrease the centralization of banking power, and reliance on fewer and fewer banking institutions would lead to even more severe recessions and depressions.⁵

1Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market's Perfect Storm (Hoboken: John Wiley and Sons, Inc., 2007), p. 58; Elmus Wicker, Banking Panics of the Gilded Age (Cambridge: Cambridge University Press, 2000), p. 120; Louis Brandeis, Other People's Money; Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History, 1900-1916 (London: The Free Press of Glencoe, 1963), p. 146.

2Bruner and Carr, The Panic of 1907, p. 58; Brandeis, Other People's Money; E.W. Kemmerer, “Some Public Aspects of the Aldrich Plan of Banking Reform,” Journal of Political Economy (December 1911); Kolko, The Triumph of Conservatism, p. 251-3, 247, 244, 248; Kemmerer, “Aldrich Plan,” Journal of Political Economy.

3Wicker, Banking Panics of the Gilded Age, p. 16, 34, Bruner and Carr, The Panic of 1907, p. 107; “A Panic and its Lessons,” Liberty (December 1907), p. 9-10; Brandeis, Other People's Money; Wicker, Banking Panics of the Gilded Age, p. 115, Bruner and Carr, The Panic of 1907, p. 58-9, Kolko, The Triumph of Conservatism, p. 154; “A Panic and its Lessons,” Liberty, p. 9-10.

4Bruner and Carr, The Panic of 1907, p. 71-3, Wicker, Banking Panics of the Gilded Age, p. 84, Bruner and Carr, The Panic of 1907, p. 90-1, Wicker, Banking Panics of the Gilded Age, p. 111-3.

5William B. Greene, Mutual Banking.

Authority's Sacrifice of the Individual

Kobayashi Masaki's films criticized the cruelty of unchecked power. They show that authorities usually force the people to compromise their morals and sacrifice a part of themselves for the benefit of a greater organization or cause. The authorities use coercive tactics such as beating and kidnapping to carry out their masters' orders and to advance their own positions. These leaders merely need to maintain a pristine reputation among their superiors in order to keep their positions, and these superiors were typically far removed from the situation and aloof, making them unresponsive to the plight of the people. In his ten hour World War II epic The Human Condition, Kobayashi portrays a man named Kaji who is trying to bring justice into managing the workers. The military gives Kaji command of a portion of workers in an ore mine because he had written that production would increase if the workers were given better working conditions and a role in the decision-making process. If the managers negotiated with the workers rationally and treated them reasonably, there would be increased motivation and morale among the workers which would manifest itself in increased production. Kaji has difficulty putting his theory into practice because he is given command of a work unit composed of enslaved prisoners of war, and no amount of rational negotiation would allow them to forget their captivity. When Kaji is forced to witness the execution of some prisoners of war who were falsely accused of attempting to escape, he realizes that he cannot sit idly by while such injustice is carried out. His vocal opposition to the execution soon turns into a loud protest from the other prisoners of war, and fear causes the authorities to stop the execution. Kaji is forced into military service and can only hope that men will have their freedom soon.

Kobayashi criticized authority for suppressing people's individual decisions, adding that forcing individuals to go against their inclinations actually damages an organization. In Samurai Rebellion, for example, a strong samurai revolts and kills many of his master's soldiers because his master kidnaps his son's wife, suppressing their “beautiful love” that he would defend at any cost. In Seppuku, a lord does not permit a samurai a few days rest before committing suicide, and as a result his father gets revenge by defiling the lord's honor and defeating many of his men. Incurring the people's wrath by suppressing their freedom and forcing them to act against their inclinations proved to be damaging to these samurai lords, who were severely damaged by revolts against their cruel leadership. In The Human Condition, Kaji admits that better food and better living quarters would motivate the workers, but says that treating them like slaves and profiting off of their labor crushes their spirit more. Even though the Japanese give women to the prisoners of war to satisfy their bodily lust and to give them an incentive to work, this does not prevent them from attempting escapes, since freedom is what they truly desire. Beatings and executions only increase their desire to escape from this work, and “no matter what, they'll manage to escape” if they want to. When Kaji becomes a prisoner of war himself at a Soviet labor camp, he admits that “socialism is better than fascism,” but he still has reason to criticize the Soviets for treating individuals poorly in the interest of the higher organization. Even though the Soviets are responsive to prisoner complaints and try to stop beatings, they still direct orders from the top down and do not rationally negotiate with the prisoners to make policy. While the Soviets say that they must destroy human lives out of necessity, Kaji cannot condone any act of exploitation because it “forms a breeding ground of distrust that can't be wiped out.” Even though the Soviets believe that forcing conformity on the group is necessary for their survival, Kaji believes that suppressing an individual's morality is wrong in every situation because of the resentment it engenders, which ultimately damages morale and decreases productivity.

Kaji's inability to cope with his positions of authority shows that Kobayashi has a pessimistic view on whether the cruel authorities can simply be replaced with good men. While many of the leaders recognize Kaji's passion and put him into positions of authority, Kaji is unable to fulfill the role because it requires him to enforce orders from above that he typically does not agree with. His friend tries to convince him that accepting a leadership role in the government would allow him to “lead the sheep to greener pastures,” but he cannot keep his position or move up because he would have to defend the unjust actions of his superiors to do so. No good men would be able to tolerate the “conflict between work and self” that comes with a position of authority. In other words, the system is such that only cruel men who can enforce orders that are against their morals flourish in positions of power.

In Kobayashi's films, the only method of combating unjust authorities is to expose their misdeeds and compromise the security of their positions, but the higher authorities are typically so far removed from the situation that they are unwilling to expose any misconduct under them. In Samurai Rebellion, when the main character shows insubordination, the lord fears what would happen “if the other clans hear” of his breach of etiquette. While other samurai agree that the kidnapping is intolerable, they still follow the tyrannical ruler's directives because of his power, which is so absolute that they would not dare to try “pushing their thoughts through.” The main character cannot expose the lord's cruelty on his own because people were not free to leave the domain to possibly appeal to the Tokugawa in Edo. In Seppuku, the main character puts a lord and his samurai to shame and damages the lord's reputation among his own men, but this does not compromise the lord's position because he is backed by the power of the distant central authority. With the Tokugawa emblem symbolically looming in the background, the lord is able to keep the entire shameful incident secret from his peers and masters, so his position of authority is secure and there is no check to his cruelty.

Beyond his criticism of unchecked authority, Kobayashi explores methods of self-management of the lower classes in The Human Condition. When Kaji is given charge of a group of miners, he lets them choose leaders among themselves who will take part in the decision-making process. Allowing the workers to choose their own representatives is the first step that Kaji takes to introduce democracy and self-rule within his work unit. The Soviets also use this strategy, employing a Japanese representative to convey their orders so that the workers will feel as if the leaders are responsive to their concerns, which will boost their morale and productivity. When Kaji is promoted to private first class and is given control of a military unit, his compassion and concern toward the recruits led one of them say that “we feel safer with you here.” This shows that humane treatment and decision-making through dialogue and negotiation boosts the workers' spirits to a significant extent. In addition, when one of the characters says that “punishment should be per regulations,” Kobayashi is saying that arbitrary punishment is disruptive and disheartening when it is at the authorities' own discretion and the predetermined procedures and rules are unclear.

These films emphasize the irrationality of absolute authority and unchecked power. Kobayashi goes so far as to claim that any action which forces an individual to go against his morals or inclinations is wrong since it involves suffering and resentment which is significant to that individual. This violation of free will can only be eliminated if the authorities' directives are optional. Under coercive monopolies, threatening the leader's position by exposing his misdeeds and ruining his reputation among his peers and superiors is the only way to make authorities do the right thing. Even this is shown to be ineffective because the decision-makers are typically far off or disconnected from the actual situation at the local level. All of this destroys the workers' spirits and causes them to engage in protest and sabotage, which radically decreases efficiency. Kaji attempts to solve this problem and unleash the productive potential of the workers by granting them elements of self-governance, but the effectiveness of these reforms cannot be measured due to the fact that Kaji would quickly lose his positions of power as a result of moral indignation toward a peer or superior. Kaji is never able to experience Japan's transformation into “a country...where men are free,” although his hope for such freedom is never extinguished.