In 1894, a scraggly band of misfits made their way from Ohio to Washington, D.C. They had a plan to present to the political class, one that they said would bring an end to the economic depression that had been sparked by the Panic of 1893 and guarantee a future of endless prosperity for all. Their plan was for the politicians and the government to print unlimited amounts of money.
Surely, that would solve everything! After all, most of these people knew exactly what was wrong with their lives. Their once booming farmland had collapsed in price. Their land was now underwater, just like millions of houses since 2008. They would be stupid to pay what they owed, and they didn’t have the money to do so anyway.
The bankers were foreclosing on them. The bankers owned the politicians. The politicians and the bankers were financially linked in every way, and the glue that held them all together was Wall Street. Everyone seemed to be making money except the little guy.
It was from this disgruntled class of indebted and bitter farmers and workers that Jacob S. Coxey recruited his army of political activists. Coxey was an American classic, a self-taught money crank who believed he had discovered the secret to perpetual economic motion. Clearly, a shortage of money was what vexed the country. Eliminating that shortage would fix all things, and, crucially, dislodge the bankers, capitalists, and politicians from their seats of power.
So they marched and marched for months on end. It was the Occupy movement of the time, using the same rhetoric and pushing the same silly ideas. The only difference then was style. Whereas the Occupiers wore tie-dye and sang folk and rapped, the Coxeyites wore suits and sang “Onward, Christian Soldiers.”
In 1894, their movement amounted to not much of anything. The Panic of 1893 was bad, but didn’t drag down everyone and everything. The politicians worked with Wall Street to dig up enough gold to keep the banking system as a whole solvent, even as many banks were allowed to go under. The money cranks, then called the Free Silver Movement as the successor to the Greenback movement, couldn’t really get a hearing. By 1897, the economy had fully recovered and the threat of the Coxeyites abated.
The entire incident is reported in careful historical detail in the opening pages of Garet Garrett’s great novel The Driver, the e-book of the week in the Spy Briefing Club. As the book explains, the real background of the Panic of 1893 had nothing to do with a shortage of money as such. In every financial panic, even under hyperinflation, there always seems to be a shortage of money. What are actually in shortage are the resources necessary to sustain an artificial boom.
The book further chronicles the life of entrepreneur Henry Galt, who wanted nothing to do with either the Coxeyites or the bankers or the politicians; he just wanted to build great things, and he did. He was the driver. In the first scene in which he appears, he notes something important about the throngs of marchers to Washington. These people don’t have to work and still they can eat. That is historically unprecedented, a sign of a level of prosperity society had never known before. Yet… it is never enough.
Behind the cyclical panics of the 19th century were speculative bubbles blown by a familiar set of forces. Politicians pushed infrastructure projects like railroad lines, which in turn encouraged wild real estate speculation around the country based on the expectation of prosperity and riches. These speculative investments were supported by a banking system that the political class worked to support in exchange for the cooperation of the banks in backing government debt.
The system encouraged investors and businesses to borrow and expand on the expectations of sure profits. They were just following the signals: low borrowing rates, money for all, a future of rising prices, and returns down the line that seem guaranteed. Then one day, the signals would change and the system would turn in on itself, revealing entrepreneurial errors and unwarranted business expansions that could not be supported by real economic growth.
It was an unending cycle of boom and bust — nothing compared with what we experience today, but it affected some people very severely. Why didn’t people know better than to stay out of harm’s way? It was the same then as now. In the boom, the people on the sidelines seem like chumps who are passing up easy profits. Even if you know the boom is a fake, no one knows when it will end. Everyone tries to make good while they can.
All of this happened before the Fed came into existence in 1913. In fact, the creation of the Fed was the final step in a long process of intervention and centralization that had taken place over decades. The late-19th-century gold standard was far better than the current system of fiat paper money, but it was not a true market. Banks were not normal businesses. Because governments at all levels regarded them as important financial partners, they were more immune to market forces than any other industry.
There are other pieces of the puzzle that explain the panics of the period. The development subsidies for railroads and the bond deals voted on by the political class subsidized financial irresponsibility. It was the same cycle again and again: capital expansion, indebtedness, and high profits, followed by a sudden turn in the opposite direction. The victims cry out for relief from the consequences of their own decisions. The remedy is always the same: more money creation.
Finally, in 1913, the political class and the big bankers got what they wanted: a system protected from real competition and systemic failure. It was the ultimate thing they had long dreamed about but were never able to get through. It was a victory for the moneyed establishment, but sold as a benefit to the Coxeyites of this world.
They would get their system of money creation. Banks would get their guarantees. Politicians would have a reliable market for their debt. Finally, and at long last, Wall Street, the banking elite, and the government would all work together with this great system called “central banking.”
Did this grant unto us unlimited prosperity forever? Actually, it marked the last days of massive economic growth in the 25 years following the end of the Civil War. It was under the gold standard, however imperfect, that we saw history’s most amazing economic expansion, a time of dramatic change toward middle-class prosperity, longer lives, and greater health and well-being for all.
The first gift of the age of central banking was World War I. The debt overhang from that calamity led indirectly over time to the boom and bust of the greatest stock market panic ever, in 1929, followed by a grueling 10 years of calamitous regimentation, government spending, and corruption, which were followed by the globally murderous Second World War. The second half of the century can be summed up in three parts: war, debt, and economic stagnation. In the course of the century, inflation laid waste to money and people’s savings.
So no, it didn’t turn out so well.
Meanwhile, the Coxeyites are still with us, still believing that more unlimited money will solve all of society’s ills. Also still with us are the bankers begging for favors. So are the politicians who spend without the money to pay. So are the speculators who play the boom-bust system as best they can. So are the infrastructure developers who go running to the government every time they find themselves overextended.
The only difference is that what was once a periodic problem has become a way of life.