Bob Massie

The Untimely Death of An Ancient “Monster:” How Deregulation Led To Crisis More Than 170 Years Ago

In Business and Sustainability, Politics on February 11, 2009 at 11:21 pm

I found a fascinating lesson from the past about the present in an article written 53 years ago about a massive struggle that most of us have completely forgotten: the battle between Andrew Jackson and the Bank of the United States. Pulitzer Prize winning author Bray Hammond, in a piece published in American Heritage, argued that early nineteenth century Americans, thrilled with the power of “steam and credit” had a huge, relentless tendency to speculate. Hammond wrote that the young country needed a central bank to help curb the mounting swells of leverage that were fueling irrational investments. Andrew Jackson, however, felt a central bank was an attack on democracy, and he fought – successfully – to destroy it. His action unleashed even more speculation, which no force could deter, that eventually led to the Panic of 1837, a terrible recession that threw hundreds of thousands of American out of work.  Hammond does not blame Jackson directly – he says that Old Hickory was misled by his advisors, who deliberately duped the president.

In other words, a bubble might have been avoided through modest restraint – but a government ideologically committed to market fundamentalism stepped in to deregulate at exactly the wrong time. Sound familiar?

When I read this piece, I realized that the United States, like most countries, rotates around the same economic track over and over again.. Many historians have pointed this out – but somehow we have trouble learning it as a society. The older generation that remembers fades away and a new generation, full of optimism and exhilaration, unwilling to look backwards for any inspiration or guidance, rushes off the precipice again. So read this quotation and imagine what our world would have been like if we had read this article four or five years ago, and realized that we were speeding towards a similar conflict between the relentless drive of wild economic enthusiasm and the sobering restrictions necessary to stable growth and balanced prosperity.

Hammond’s piece had this initial summary: “Andrew Jackson battled the Bank of the United States with all his furious confidence. Was his victory the nation’s loss?”

“Andrew Jackson smote the bank fatally at the moment of its best performance and in the course of trends against which it was needed most. Thereby he gave unhindered play to the speculation and inflation that he was always denouncing. To a susceptible people the prospect was intoxicating. A continent abounding in varied resources and favorable to the maintenance of an immense population in the utmost comfort spread before the gaze of an energetic, ambitious, and clever race of men, who to exploit its wealth had two new instruments of miraculous potency: steam and credit. They forward into the bright prospect, trampling, suffering, succeeding, failing. There was nothing to restrain them. For about a century the big rush lasted. Now it is over.

And in a more critical mood we note that a number of things are missing or gone wrong. To be sure, we are on top of the world still, but it is not very good bookkeeping to omit one’s losses and count only one’s gains. That critical move was known to others than Jackson. Emerson, Hawthorne, and Thoreau felt it. So did an older and more experienced contemporary, Albert Gallatin, friend and aide in the past to Thomas Jefferson, and now p-resident of a New York bank but loyal to Jeffersonian ideals, “the energy of this nation,” he wrote to an old friend toward the end of Andrew Jackson’s administration, “is not be controlled; it is at present exclusively applied to the acquisition of wealth and to improvements of stupendous magnitude. Whatever has that tendency, and of course an immoderate expansion of credit, receives favor. The apparent prosperity and the progress of cultivation, population, commerce, and improvement are beyond expectation. But it seems to me as if general demoralization was the consequence; I doubt whether general happiness is increased; and I would have preferred a gradual, slower, and more secure progress. I am, however, an old man, and a young generation has a right to govern itself…” In these words, Mr. Gallatin was echoing the remark of Thomas Jefferson that “the world belongs to the living.” Neither Gallatin nor Jefferson, however thought it should be stripped by the living. Yet nothing but the inadequacy of their powers seems to have kept those nineteenth century generations from stripping it. And perhaps nothing else could.

But to the extent that credit multiplies man’s economic powers, curbs upon credit extension are a means of conservation, and an important means. The Bank of the United States was such a means. Its career was short and it had imperfections. Nevertheless, it worked. The evidence is in the protest of the bankers and entrepreneurs, the lenders and the borrowers, against its restraints. Their outcry against the oppressor was heard and Andrew Jackson hurried to their rescue. Had he not, some other way of stopping its conservative and steadying influence could doubtless have been found. The appetite for credit is avid, and Andrew Jackson knew in his day, and might have foretold for ours. But because he never meant to serve it, the credit for what happened goes rather to the clever advisors who led the old hero to the monster’s lair and dutifully held his hat while he stamped on its hea d and crushed it in the dust.

Meanwhile, the new money power had curled up securely in Wall Street, where it has been at home ever since.”

From “Jackson’s Fight With the “Monster””by Bray Hammond, A Sense of History: The Best Writing From the Pages of American Heritage, [New York: American Heritage Press, 1985] page 184-185

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