The Panic of 1907 was caused by over building of railroads, shipping, oil, and a myriad of other nascent industries. Heavy infra-structure spending caused demand for loanable to exceed the supply that would come from the operations of the plant already in place. The lack of a mitigating factor like the FED caused a run on the money post of the NYSE which then functioned as the brokering center for private funds. Normally liquid industrialists were over-committed too, so a constraint on supply enabled a small marginal demand to substantially raise rates. It took J.P. Morgan walking onto the floor calling out he'd take all bids to save the day. Morgan played the role of the FED by maintaining a continuous orderly market when human emotion would caused the market to completely break down and shut its doors for an indefinite time. Eventually it would re-open and things would continue, but in the interim a nasty shock to the economy would squander lives and hopes. Thus, the government was minimally involved.
The government busted Gould and Fisk because they were attempting to usurp what the Constitution specifically said was the duty of government, protecting the coin of the realm. Indeed, it may be asserted that the attempt to de-monetize gold started because those two clowns created the possibility that through the control of gold, lawful authority over money could be undermined by anyone including foreigners. Gould acted on his own and was able to operate because there was minimal intervention by the government in the market. The only erroneous policy the government made was that they let the shenanigan go on too long. They did this because President Grant couldn't believe that these two clowns would have the hubris to attempt such an absurd action.
The FED was created because it became apparent after the Panic of 1907 that private individuals wouldn't have the resources necessary even as a group to repeat that which almost busted JP Morgan. The banking system itself also had grown to a point where its transactions were not commensurate to its level of trust. The Federal Reserve System was created to avoid the panics and discipline the member banks so that uniformity of conduct was achieved. There is nothing wrong with the Fed System. In fact, it is a remarkably valuable institution.
Individual control of money would create worse chaos than the pretense of knowledge wielded by the FED. The only error the FED has made in recent decades is the attempt to control the price of money as though they new what it should be better than the market knows. The FED followed money targeting between 1988 and 1993. The effect of that brief period was so profoundly constructive that no one knows about it. I believe it created the basis upon which current prosperity is built. If the FED had persisted in this policy, that basis would be impregnable. Instead they have reverted to the old evil and they will make Americans pay for the error. The prosperity of constructive policy is being shredded by this latest reversal to an old pretense to knowledge. |
