September 23, 2008
On banking crises c. 1908

More from the "there are no new problems, only our problems" drawer, the Sept. 23, 1908 NYT reports:

"Europeans believe that the world panic of last Autumn was caused by our banking system; that there is no assurance against a recurrence of the trouble until the banking system is reformed. And I agree with Europeans," remarked Jame B. Forgan, President of the First National Bank, upon his return from a trip abroad today. He continued:

"Over there in Europe, when a monetary scare occurs and spreads, there is at once a unanimity of action among bankers. Money begins to flow to the country's financial centre. The Bank of England, for instance, raises its discount rate; it gets gold from everywhere; the monetary resources of the country are laid under contribution for the benefit of the big bank or banks. The people are then shown the strong position of the large institution or institutions, and are calmed thereby.

"Here in the United States we are the victims of a process the direct reverse of that obtaining abroad. when apprehension seizes the Nation our one or two big piles of cash are pounced upon by a myriad of little bankers throughout the country, who make hundreds of piles of them, and who, after getting the money, do nothing but stare at it, having really no use for it.

"In the meanwhile, the cash means of the financial centres are more or less depleted. Their reserves inevitably sink below the 25 per cent limit demanded by the banking law. The newspapers herald this fact, call attention to it, and the panic is emphasized. The people think that the big banks haven't much cash, and wildly conclude that if the important banker is in that condition, what must be the position of the little fellow, not knowing, not understanding, that the crisis has been brought about by the very fact that small bankers want to build little piles of money to look at.

"I haven't the time or the inclination at present to go into the remedial phase of the question - I'm not proposing a central bank, mind you - but I know we cannot go on in the old way with any sort of safety.

"I could not reply to the censure of Europeans simply because I knew that their strictures were fully deserved. i sat there and took it all as a representative of a faulty system must."

Well, it only took 100 years but it would seem that we have come full circle. One wonders whether the reform Mr. Forgan had in mind would have made it harder for his bank to make money. I wager not.

I am not a monetary historian or monetary economist, we have other contributors who fill that role, but from this economist's perspective the crisis of today seems to have been born from the pragmatic politics of the past (whether the pragmatic politics centered on "affordable housing" or blocking "reform" of the quasi-government moral hazard centers).

Posted by Craig Depken at 04:00 PM in Economics

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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