Speaking of myths about U.S. banking, another that tops my list is the myth that the Federal Reserve, or some sort of central-bank-type arrangement, was the best conceivable solution to the ills of the pre-1914 U.S. monetary system.
I encountered that myth most recently in reading America’s Bank, Roger Lowenstein’s forthcoming book on the Fed’s origins, which I’m reviewing for Barron’s. Lowenstein’s book is well-researched and entertainingly written. But it also suffers from an all-too-common drawback: Lowenstein takes for granted that those who favored having a U.S. central bank of some kind (whatever they called it and however they chose to disguise it) were well-informed and right-thinking, whereas those who didn’t were either ignorant hicks or pawns of special interests. He has, in other words, little patience with history’s losers, whether they be people or ideas. Like other “Whig” histories, his history of the Fed treats the past as an “inexorable march of progress towards enlightenment.”
Don’t get me wrong: I’m no Tory, and I certainly don’t think that the pre-Fed U.S. monetary system was fine and dandy. I know about the panics of 1884, 1893, and 1907. I know how specie tended to pile-up in New York after every harvest season, and that by the time it got there not one but three banks were likely to reckon it, or make claims to it, as part of their reserves. I also know how, when the harvest season returned, all those banks were likely to try and get their hands on the same gold, and how this made for tight money, if it didn’t spark a full-scale panic. Finally, I know that one way to avoid such panics, on paper at least, was to establish a central bank, or “federal” equivalent, capable of supplying banks with emergency cash when they needed it.
Yet I still think that the Fed was a lousy idea. How come? My reason isn’t simply that the Fed turned out to be quite incapable of preventing financial crises, though that’s certainly true. It’s that there was a much better way of fixing the pre-Fed system. That alternative was perfectly obvious to many who struggled to reform the U.S. system in the years prior to the Fed’s establishment. It could hardly have been otherwise, since it was then almost literally staring them in the face. But it should be equally obvious even today to anyone who delves into the underlying causes of the infirmities of the pre-Fed National Currency system.