a blog by Elisabeth Young-Bruehl

America’s original independent government, as every school child knows (one hopes…), was set up so that two key “checks and balances” would keep it in lawful harmony. Way ahead of the science of ecology, the Founding Fathers thought like political ecologists, understanding that if too much decision-making accumulated at any place in the governmental system the principle of equality that animated the whole would be lost. If it was to be a system of, by and for the people, no group of the people –not even “the majority” in an election– should ever emerge as the rulers or the directors. Sometimes, the people would have to put up an army and be led by a general, as the colonists had been led by General Washington in their war for independence; but when General Washington was elected the first President, he became not a ruler–like the English king recently defeated–but a leader for a time, checked and balanced by a legislature and a judiciary, and called upon to respect state governments while he led the national government. Each state government, too, would have a three-branch internal balance comparable to the federal government’s.

There were flaws in this “checks and balances” work of genius. “The people” did not include all the people—women could not participate, African slaves and their descendents could not participate, the aboriginal peoples whose lands had been usurped by colonial settlers could not participate, no provision was made for new immigrants to participate. The citizens were not able to elect their national leaders directly, both because the Senate half of the Congress was (like a House of Lords) at first not elected and because the Electoral College was created as an intermediary in Presidential elections. Until the Marshall Court (1801-35), The Supreme Court was a not imagined as having responsibility to protect the Constitution itself and the whole system of checks and balances. Now that this responsibility is clear a great deal of new obfuscation hinders the Court as its “strict construction” members try to close off debate about how the Constitution should be our guide in a world quite different than the world of 1776.

But, basically, the idea of checks and balances was an ideal idea, and the country’s health over its more than two hundred years of life can be judged by how well the ideal has promoted the principle of equality and how well adjustments of the ideal to changing worldly realities have promoted the principle of equality.

At the beginning of our country’s history, nobody was giving a lot of thought to what was known in France as “the social question.” For many of the French revolutionaries, and certainly for the Socialist tradition that grew out of their revolution, it was obvious that the economy of France, and eventually the economies of all nation-states, would need to be directed toward solution of “the social question,” that is, toward elimination of poverty, perhaps elimination of the whole class structure, perhaps even toward the elimination of privatized common property as the underlying cause of economic inequality. How to address the social question was the riveting political question.

In the ecology of America, “the social question” was not a pressing issue for three reasons: the abundant natural resources of the country supplied everyone who could wield tools with the means to make a living; the abundance of land assured that movement of people onto undeveloped land, particularly to the west, would promote prosperity for all; a sanctioned slave and child labor system and a domestic labor system in which women were unpaid workers supported bigger and bigger agricultural enterprises (plantations) and the growing resource extraction and factory systems as well. The economy of the country did not seem to need direction or plan other than a land-settlement mechanism and a rudimentary system of taxation for the development of what we call “infrastructure” that was beyond the means of individuals or small communities –chiefly, transportation infrastructure to connect the settlements and facilitate trade. There were Founding Father voices in favor of a central, national bank on the Bank of England model–Alexander Hamilton’s chief among them—but the banking question was, basically, left in abeyance through the 19th century, after two early attempts at establishing a central bank failed.

Planning for economic development was not the responsibility of any branch of government, although all three were involved as specific decisions came up. But by the end of the 19th century, when the economy had industrialized and huge enterprises were slowly suppressing smaller ones in both industry and agriculture, and when the original start-up conditions –seemingly endless abundance of resources, land, and labor—were long gone, questions arose that needed forums for political discussion and debate. Meanwhile, however, an ad hoc arrangement for planning had grown up. Private people dedicated to the growth of the economy –capitalists— teamed up with state and federal governments for the financing they needed to undertake large-scale projects, like railroads, canals, road-building. There was planning for capitalism’s growth and for the capitalists to profit; but “the people” were not involved except when they, as workers, got the short shrift of economic development and created unions to express their grievances.

The emergence of the federal treasury as the bank for capitalists was happening in Europe, too, and huge projects –like the Suez Canal—facilitated the international growth of capitalism, that is, capitalist imperialism. American enterprise went overseas, too, but the bulk of it was inside the country and at the country’s borders, with Mexico particularly, where questions of land ownership were settled by border wars conducted and funded by the federal government. War was very big business.

As the ad hoc alliance of state and capital grew at the end of the 19th century, in the era of the “robber barons,” the “Gilded Age” as Mark Twain called it, a series of booms and busts, growth spurts and recessions, and runs on private banks began to spook the capitalists. Particularly after a very severe banking panic in 1907, when the whole private banking system was saved from collapse by J.P. Morgan’s almost single-handed intervention, a movement coalesced among the major capitalists, who happened, not coincidentally, also to be the major private bankers, in favor of a national bank that would be directed by the capitalist bankers. They wanted something like a banking cartel to do what might be called economic planning of, by and for the bankers and capitalists.

There were, fortunately, elected leaders who realized that this would not be a very democratic solution and criticized the so-called “Money Trust” headquartered in New York (which we now call “Wall Street”) for their self-serving proposal. Critics pointed out that such a public bank in private hands would be very likely to favor the credit needs of the Eastern capitalists and ignore those of Western agrarians, of small business entrepreneurs, and of workers of all sorts. Fewer of the critics emphasized that such a bank would be, in effect, a fourth branch of government designed to control and make plans for the entire economy through one mechanism: monetary policy. This fourth branch would be of the government, in the sense that the Legislature would have to bring it into being, but its directors would be unelected and not even appointed by the Executive (as the judges of the Supreme Court are). Its decisions and planning were set up to be secret.

A compromise was struck. In 1913, the Federal Reserve was created by an act of the Legislative branch to be a government agency, co-ordinated with regional banks, but it was to be independent of any branch of government. Its director and directorship would be appointed by the Executive, so they did not, in effect, own the bank. But they did, as it turned out, all come from the banking community (for who else understood monetary policy?). Taking charge of monetary policy, “the Fed” got busy managing the recurrent panic situations by controlling price inflation. Price inflation, in the mind of a capitalist, is the enemy of growth: if you make a careful calculation that you must invest so much capital in a project, pay so many workers such and such a wage, spend just this much on materials, in order to make exactly x in profit, but then the price inflates so that the demand for your product decreases, you are cooked. The whole capitalist formula, minimum investment for maximum return, breaks down. So, a central bank ought to get rid of the wild card, the potential disruptor, inflation, by making sure that there is credit at a low interest rate, both to keep the initial cost of capital small and to keep demand constant and thus profit secure.

Since 1913, fear of inflation and all people and processes that might cause inflation has been built into the mission of the Federal Reserve, to the point where, especially since the early 1970s, its directors –most obviously, Alan Greenspan—have set interest rates dictatorially, by fiat. This is what America has now in the way of economic planning: a monetary policy compulsion that favors “the Money Trust” or “Wall Street.” “The economy” now has (in effect) a branch of government dedicated to its financing. But the unelected Federal Reserve “represents” only one segment of the economy, the financiers and the owners of enterprises, particularly very large enterprises, and only one vision: endless growth and maximizing profit without the dreaded inflation that might destroy profit. This is not the kind of thinking that can address a question like: should risky off-shore oil drilling in waters that belong to the people be allowed?

The history of the Federal Reserve, our unacknowledged and very little checked or balanced fourth branch of government, is one hundred years long now, and full of complexities and moments of profound change. Since the Depression and WWII, it is no exaggeration to say, attitudes toward it have been determined by one matter of interpretation: did the Federal Reserve precipitate the Great Depression by constricting money flow from 1929 until 1933 or not? Those who believe that it did, subscribing to an argument spear-headed by Milton Friedman of the “Chicago School” of economists, draw two conclusions. The first is “Never Again!” That is, the Fed must never again constrict money supply in a crisis, precipitating a Depression. The Fed must not look closely at what caused the crisis, just be ready with the right answer: more money. In November, 2002, the current Fed chair, Ben Bernake, after apologizing for “abusing slightly my status as an official representative of the Federal Reserve,” paid hugely sentimental obeisance to Milton Freidman by proclaiming, like a schoolboy son to a chastising father: “Regarding the Great Depression. You’re right, we [he was speaking as though he had been head of the Fed in 1929] did it. We’re very sorry. But thanks to you we won’t do it again!” In the fall of 2008, as the head of the Fed, he certainly did not stint on pouring money into the banking system and into huge enterprises controlled by the quite unregulated banking system. He was a good boy. But now what? What about the causes of the crisis he “fixed”?

The second conclusion that has followed from Master Friedman’s interpretation of the Depression is that the Fed really should not exist, it does more harm than good, and “the economy” would be much better off without any quasi-government oversight. This is an argument against a planned economy and for “free markets.” But most who embrace the argument think that the best way to act on it is to go back to the original pre-1913 idea that Wall Street should absolutely control the Fed, the Fed should be its creature and have no independent oversight. The Fed, then, would not be the Fed, it would be Wall Street’s bank. However, there are also wild anarchist advocates of the anti-Fed argument. Senator Ron Paul of Texas insists, as many did in 1913, that the Federal Reserve is unconstitutional. Populists without vision –that is, Tea Party people—love this claim because it supports their desire to limit government or secede from it, come what may. Off with the Fed’s head! they say, like the Queen of Hearts.

There is nothing like a panic to put fundamental political questions right on the table.
Currently, we are where the country was in 1907-1913 while the Federal Reserve was debated and created in a panic atmosphere. The fundamental question is how can the people best discuss and debate the direction they want the economy to take, the way they want it to develop, the means by which it can support all the people—which is a different matter than the means by which it can profit one group. The people’s questions are not about monetary policy per se, but about how the three branches of their government can co-ordinate to regulate the economy so that the economy, like the government itself, promotes the principle of equality. As long as Wall Street, or “the Money Trust,” controls an unacknowledged fourth branch of the government that was not set up to represent the people or be transparent to the people, the people are not going to have their say in how the resources and the land that are theirs in common are managed and protected. for now and for future generations.

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