I take the subway twice a week to Brooklyn College, where I work. It offers a perpetual lesson in statism. However, I was pleasantly surprised the other day. An eccentric mendicant who wanders through the subway cars and screams about the end of the world (I have observed him once or twice a semester every year for the past decade) stepped on board and began screaming about the Declaration of Independence. One of the subway riders, a young black male about 22 years old, called out to him–”What about the Federal Reserve Bank? Don’t you think it ought to be abolished?”
I was pleasantly surprised. Increasingly, Brooklynites as well as Americans in general have been asking questions about the Federal Reserve Bank. If one of the parties decides to take this issue by the horns, it will be winnable. This is so in part because the statist media will have trouble responding to it. They can trot up Keynesian economists to argue, but the economists themselves can be made to be part of the issue. They are themselves, after all, on the special interest Fed gravy train.
There have been six major party realignments in American history. At least five of them had to do with central banking:
1. 1790-1800. The Federalists favored the First Bank of the United States, the Democratic Republicans opposed it. The Democratic Republicans won. The First Bank was abolished around 1811. It was reestablished in 1816 because the nation had trouble getting funding for the War of I812.
2. 1828-1836. The Whigs and the Democrats, both spin offs of the Democratic Republican Party of Jefferson were formed over the central banking issue. Andrew Jackson favored abolition of the Second Bank in 1836. The Whigs, the precursors of the Republicans, opposed it. Jackson abolished the bank, withdrawing federal deposits in 1832 and refusing to renew the charter in 1836. The two parties, Whigs and Democrats, formed almost entirely over the bank and related big government plans of Henry Clay and his followers, including Abraham Lincoln. The Whigs were an early version of the Republican Party. Following 1836 no party dared to propose a central bank until 1896.
3. 1860. The Civil War led to the Republicans becoming the leading national party. The issue was not banking. However, the centralizing impulses of Abraham Lincoln and the Republicans (as seen in the National Banking Act passed during the Civil War) contributed to Progressive centralizing impulses, especially the Federal Reserve Bank.
4. 1896. The Democrats decide to become the party of inflation and central banking through the Populist candidacy of William Jennings Bryan. Most historians characterize Populism as a poor farmers’ movement. It might be more accurately characterized as a sub-prime real estate movement. From 1850 on the federal government had distributed public lands to real estate investors, many of whom were western farmers. As Richard Hofstadter points out in several of his books, American farmers were more real estate investor than farmer. Many of these investors hoped that the land would appreciate. The gold standard caused the land to depreciate. The worst farmland was probably hard hit by price depreciation. The Populist movement flourished in western regions with poor farm land. At the same time, workers were seeing substantial improvement in real wages. According to David Ames Wells, a noted economist of the period (whom Henry Hazlitt unfairly criticizes in his classic “Economics in One Lesson”), showed that steady productivity improvement from 1840 to 1889 caused real wages to more than double. This includes, of course, wages of agricultural labor. However, stock and real estate prices did not appreciate so rapidly as wages, and land owners as well as investment bankers protested. John Maynard Keynes later translated the Populists’ ideas into his ideology.
5. 1932. The Democrats replace the Republicans as the chief Progressive and centralizing party. Roosevelt applied many of Bryan’s and Theodore Roosevelt’s ideas. He also abolished the gold standard, giving the Fed free rein and creating the opportunity for ever greater wealth transfers from poor to rich. He did all this while claiming that he was the president who represented the poor. Americans, including most conservatives, believed him and continue to believe him to this day. Barack Obama continues this tradition. A pawn of investment bankers, he wins the passionate love of the poor and working class whom he bilks.
6. 1980. Ronald Reagan runs against the inflation of the 1970s, caused by Richard M. Nixon and his Fed chief, Arthur Burns. Jimmy Carter had appointed Paul Volcker, who adopted the monetarist ideas of Milton Friedman. Friedman’s theory of fixed monetary growth did not work, but significant raising of interest rates that President Reagan continued for a couple of years killed the inflation of the 1970s. However, the supply-siders in the Reagan administration renewed inflation soon thereafter. The result was a major shift in party power.
Of the six shifts, all except the Civil War ascendancy of the Republicans involved some focus on banking issues. The fight between the Federalists and anti-Federalists, the first party system, was largely about banking. The fight between the Whigs and the Democrats was also mostly about banking. The Democrats’ decision to adopt Populist ideology in 1896 was also a banking issue. The re-alignment of 1932, where the Democrats became ascendant for 40 years, was explicitly about social welfare programs but included critical shifts in central banking policy and the abolition of the gold standard, which were probably the most important steps that Roosevelt took. Finally the shift toward the Republicans in 1980 was not explicitly about the Fed but hinged on inflation, which is really the same banking issue that motivated Jackson in 1832. By 1980 the electorate had been so mis-educated and bamboozled, they were not able to demand discussion about the Federal Reserve.
This seems to have changed. The public, like the young man in the subway, is increasingly asking questions about central banking.
But the Republicans have yet to raise the issue, because since Richard M. Nixon and George W. Bush they have become complicit in the biggest of big government scams.
The Republican Liberty Caucus needs to take the Federal Reserve Bull by its horns. This issue needs to be brought front and center. The American public is angry enough to support a new libertarian revolution.
Mitchell Langbert is associate professor at Brooklyn College. He can be visited at http://www.mitchell-langbert.blogspot.com.