My cousin, who politics I have never quite been able to figure out, gave me a copy a few months ago of G. Edward Griffin’s The Creature from Jekyll Island, a popular paleo-conservative/libertarian attack on the Federal Reserve System. Its title comes from the famous secret meeting at Bernard Baruch’s estate on Jekyll Island in Georgia in 1913 that helped establish the Federal Reserve System. The book is a strident attack on the Fed, and argues that it has over the years led to gross distortions in the free market, to the benefit of a handful of rich bankers and the detriment of almost everyone else. It calls for the restoration of a form of the gold standard, arguing that principal function of the Fed, whatever else it claims to do, is to circulate an adulterated currency, which is inherently inflationary. Like many paleo-conservative works, it asks many of the right questions, though mostly comes up with wrong answers. But there is no question that the concerted efforts under Alan Greenspan to keep interest rates low was the basic kindling the housing boom needed to start burning, and low interest rates tend to make investors seek cleverer and cleverer schemes to manufacture ever higher rates of return.
But The Creature from Jekyll Island tends, like many of these sorts of books, overly conspiratorial in its historical thinking, and careens from one extravagant claim to another. For a much more carefully researched history of the origins of the Fed, I recommend William L. Silber’s recent and excellent, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy.
As I said, The Creature from Jekyll Island, like other books of its ilk, often ask the right questions, and I thought of the book this morning, after reading accounts of the meeting between Paulson and the leaders of the largest banks in the country –are we nationalizing the banks or are the banks privatizing the US Treasury.? Certainly the meeting Monday was perhaps the most dramatic meeting in the history of American central banking, with Paulson pleading with eight of the largest financial institutions in the country to take $150 billion in additional capital, and with the bankers, after much hemming and hawing and standing on their principles, reluctantly agree to take the money, for, “the good of the country,” like Cincinattus at the plow.
Look, I think this is basically a good thing, certainly better than the asset purchases that Paulson had been peddling a few weeks earlier. But it seems very much like what happened in 1913, when the Federal Reserve System was invented not to change the existing financial quo, but to preserve it. There are a lot of questions which seem not to have been asked, or asked sotto voce –why purchase preferred stock rather than common stock? Yes, there are advantages to owning preferred stock as a creditor, but it means that the government will have no control or say in how the banks operate. Why no members of the government on the board of directors? (The limits over executive compensation are weak, but that is only to be expected.) And why no controls over what the banks can do with the money? There is nothing to prevent them from using the money, borrowed at 5%, to retire debt owed at 10%. What if the banks still don’t lend? One thing is clear; the economy is in for a very rough patch. Nothing will turn around the economy in the short run. And in the long run, not only will we be all be dead, but we will need a new banking system. I don’t know if the Treasury needs to nationalize the banking system—Clement Atlee where are you at this hour?—but it needs to take effective control of what banks do, and make sure that what they do is in the nation’s interest. What Paulson did what not enough, and I can only hope it doesn’t tie the hands of an Obama administration. We need to be sure that the government is dictating terms to the bankers, and not the reverse,