Friday, April 29, 2011

Astroturfing Bankers in the Age of Jackson

In the early 1800s, the US banking system was dominated by a unique blend of proprietary bank notes held by wealthy merchants and a working class mostly limited to foreign currencies (when they were lucky enough to earn real money at all). New England merchants, ever reliant on European trade, had developed or maintained extensive connections to prominent European trading partners. The capital to valorize these products, coupled with the unique trading opportunities that a continent of untapped resources offered, were fertile ground for a rising class of bourgeois. A shipbuilding/fishing economy had given way to an international-mercantilist model, and the monetary supply could hardly keep up with growth.

As this rapid accumulation of capital progressed, a clear winner was bound to emerge - and the US Government wasn’t playing around: they were going to enthrone the financiers to their own ends. Remember, in those days money wasn’t quite as easy as it was now – loans were in the form of promissory notes or proprietary bank notes: unlike fractional reserve banking, there was little liquidity in loaned value. This was such a problem that it would cause a run on debt in 1937. For the better part of the century, the country was set to witness profound clashes between nearly monolithic financial interests - interests, it turns out, that would manipulate popular movements to push their own financial agenda, all in the name of the "free market."1

A Northern Problem

New England bankers did pretty well throughout this era. They enjoyed a $10 million injection of capital in the form of the first ever United States Bank – and unlike previous loan offices owned by the state, the fledgling empire’s new business model was limited to 20% public ownership. By the time of its liquidation in 1811, more than a hundred competing firms had sprung up, and the bank only accounted for 15% of net national investment. 70% of the bank was owned by foreign investors by this time. New York had such a stake in the First United States Bank that, despite being headquartered in Philadelphia, 19% of federal treasury deposits were at the bank’s headquarters while 28% were at the New York Branch. Back in those days, legislators were no stranger to graft – but in Hamilton’s case, he actually recused himself from voting on the bank’s dissolution, despite having stake in the matter.2

New York had even won a major victory with the Constitutional  guarantee that states’ war debts would be paid off – per capita, New York’s debt was at least half that of each Virginia, North Carolina, South Carolina, Connecticut, and Massachusetts. In addition,
“The Constitution held out to merchants and manufacturers the advantages of a large free-trade area, a single national currency, the protection of commercial credits in all states, and a stimulus to business that would come with the issuing of sound public securities.”3

National banking and monetary 'regulation' was largely managed by private firms, as state apparatuses emerged in kind to meet their needs. A second foray into pseudo-central banking proved far too unpopular with Northern bankers and Southern property owners alike – this time, the Second United States Bank drew ire for its ability to readily exchange gold for its bank notes – ironically, the “antimonopoly” opposition eventually cited thinly-backed bank notes as a political target (though these US Bank notes enjoyed the strongest backing). These forays were largely transferring a public utility to the private sector (First United States Bank, for instance, was almost purely a commercial bank by the time it was dissolved) – and prominent figures standing against one another in government (Hamilton, Jefferson) benefitted in tandem from the ventures. Capitalism had quickly expanded its role as a form of production to subsume the monetary/regulatory functions normally exclusive to a state.3,8

The Peasants Rise

Problem was, this accumulation of power meant that public interest was even less likely to factor into the monetary policy of preeminent banking firms. Common household products were skyrocketing in price and foreclosures increasingly common. On top of this, massive debt held by states and private citizens alike threatened to capsize the banking system. Back then, those outraged at the bankers made real demands in their own interests - and they acted on them:

“Unhappily, many victims of hard times sought relief in direct action instead of concentrating their efforts on state legislature. … Above all, the malcontents insisted upon stopping foreclosures, and to this end they demanded either the abolition or the adjournment of the intermediate courts that had dispossessed debtors or had sent them to jail. Not content with verbal pleas, insurgents marched to county towns, where they closed the courts, coerced judges into suspending business, and raided jails to release debtor inmates.”3

Fledgling popular movements are ripe for exploitation. Soon enough, some of these activists started saying things we will find all too familiar: “Hostility to any and all monopolies by legislation.” Gold was cited as the “only legitimate form of money.” A swelling of ”democracy,” led by the Jacksonian petty bourgeois, sought to cement their place in US society in the face of an emergent class of bankers. Their movement was called “Locofocoism,” and it was firmly couched in moral-religious doctrine, to the degree that they released a pamphlet with moral guidance as to how to spend the Sabbath. 4,5

Van Buren went on to institute some of their most cherished policy proposals, and his “Albany Regency,” with much overlapping with the Locofocos, were some of the harshest critics of corruption in government – but as soon as they entered public office, many of them openly engaged in the same, at one point to such a degree that one famously declared: “to the victors belong the spoils.”

Death of a Bank

Where did these Locofocos come from? Undoubtedly, it was the turmoil and harsh conditions of the late 1830s which helped to induce a political realignment. But there were more subtle forces at work.
It turns out that the Locofoco, antagonists of monopolies such they were, had propertied clout of their own:

“…New York is the only one of the Free States where in the Loco-Foco party there is nearly, if not quite as large an amount of property as there is in the Whig party”6

Couched among pro-banker polemics, Catterall manages a few points:

“The opposition of state banks whose interests were involved arrayed a powerful party against the bank. It had forced many of them to restrict their business by compelling payment for their notes in specie
[In New York], the bank reduced the profits of the state banks, because it loaned at 6 per cent., being compelled to do so by its charter, while the New York banks which might legally have charged 7 per cent., were compelled to loan at the lower rate because the big bank did so; another reason for hostility was found in the safety-fund system which bound the politicians and the bankers in a common union. The politicians expected to control the New York banks through this system, but could not reach the [Second] Bank of the United States…”7

Both the first and second Banks of the United States offered comprehensive service in each of their facilities, an innovation in banking. Smaller-scale bankers couldn’t compete; or at least, couldn’t provide the same low-quality service for the same high rates as before. The state-sanctioned banks were consistently profitable, too. So the bankers set out to remove that sanction:

“The Loco Focos, whom two generations of historians have treated as virtual Jacobins because of their agitation against financiers, have recently been demonstrated to have won support from literally hundreds of New York City bankers and merchants, whose plans for “free banking” and other reforms could plausibly be passed off as “antimonopoly” measures. Van Buren’s controversial plan for an Independent Treasury arose in response to demands from these quarters.”8

So the Locofocos, anarchists as they were, paved the way for private usury - for the good of the working class, of course. They were Democrat’s after all. In the end, they got President Jackson to do their work – and the astroturfers were overjoyed. Like Van Buren, Jackson’s attempts to discredit the bank were undermined: Van Buren admitted at one point that he agree it was constitutional, and Jackson’s inquiry into the bank refuted his own reasoning “at every turn.” Nonetheless, the bank’s charter was never renewed, and The Manhattan Company and Girard Bank were released from the yoke of monopoly banking, the road paved to fill that very power vacuum.4, 7

1Tom Kelleher The Debit Economy of 1830 New England
2Perkins, Edwin J: American Public Finance and Financial Services 1700-1815 Pp. 235-236, 252,
3 Nettels, Curtis Putnam: The Emergence of a national economy, 1775-1815
4Byrdsall, Fitzwilliam: The History of the Loco-Foco, or Equal Rights Party: its movements, conventions and proceedings 1842 pp. 39
5Greenberg, Joshua R:  Advocating The Man: Masculinity, Organized Labor, and the Household in New York, 1800-1840
6Ashworth, John: "Agrarians" and "aristocrats": party political ideology in the United States 1987 pp.169
7Catterall, Ralph Charles Henry: The Second Bank of the United States 1902 pp.166, 198
8Ferguson, Thomas: Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems. 1995 pp. 56-57
Thornton, Richard Hopwood: An American Glossary: being an attempt to illustrate certain Americanisms upon historical principles 1912 pp. 551-2

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