Monday, April 05, 2010

A Fascinating Exchange on Pre-Fed Banking Regulation

Almost 100 years ago, the US Congress was investigating the Money Trust, as the concentration of money and power on Wall Street was then called.  The St. Louis Fed has documentation of the hearings of the House of Representatives Subcommittee on Banking and Currency into the matter, better known as the Pujo hearings, which make for fascinating reading.

Then, as now, people were concerned with the power of Wall Street, and the deceit (stock and commodity price manipulation, inter alia, has been around for a long time).  Unlike the current situation, however, big finance was largely self-regulated  (then, as now, there were laws, but then, it seems, big finance thought the government too lax, and slow to act), and the idea of a government bail-out would have been absurd to men like J.P. Morgan. 

Also unlike today, the then captains of finance were all in favor of closing down insolvent banks, and even temporarily solvent banks who might well be frauds, even before the government got involved, as this exchange between Samuel Untermyer, Esq.,  counsel for the committee and J.P. Morgan demonstrates.

Mr. Untermyer: Do you not think there ought to be some authority, in the State or Government somewhere, to give to a solvent bank the right of clearance through the association?

Mr. Morgan: Yes; but it depends upon in whose hands the bank is.

Mr. Untermyer: Oh, you think the competitors of a bank ought to determine into whose hands it should go?

Mr. Morgan: For instance, suppose I were the clearing house- I would not be in favor of allowing a man to be associated with me that I thought was a fraud, simply because he owned a bank which at that particular moment was solvent.

That's a powerful argument in favor of private owners policing their own industry, which, as an aside would not work today as the banks are all publically ownedPerhaps the current regulatory problems are unintended consequences of breaking up the large privately held conglomerates. Nothing like fear of personal loss to keep one on the straight and narrowWould Goldman have taken a different path over the past decade if they had remained private?

The view above might also be a defense against claims that certain banks had "shaken down" others in the Panic of 1907.  It's hard to tell without all the accounts available.  It does make me wonder if JP were alive today, (and as good as his word) would he have instigated a panic before things got so out of hand, and wound down the offending banks (and gotten grief about it for having too much power).  As best I can discern he seemed to take the issue seriously. 

The exchange continued:

Mr. Untermyer:   The question I ask you is as to whether competitors should have the fate of another competitor entirely in their hands. to close it up or let it go on, without any review anywhere.

Mr. Morgan: If they are insolvent, I think they should be shut up at once.

Mr. Untermyer: But do you think the competitors should have the right to pass upon that without any review.

Mr. Morgan: There is no other review possible that I know of.

Mr. Untermyer: Do you not think a review on the part of the banking authority would be possible?

Mr. Morgan: Not unless there is time. The question of time comes in.

Mr. Untermyer: It does not take long to telephone, does it?

Mr. Morgan: It does sometimes.

Mr. Untermyer: It takes too long to give the bank a chance, Anyway?

Mr. Morgan: Yes. Sometimes some people have to step in and take the bank’s balance in order to get them cleaned, at that.

Mr. Untermyer: Have you known of other banks doing that and getting well paid for it?

Mr. Morgan: I have known of some people doing it without being paid at all.

For Mr. Morgan, the key question in banking was character.  The idea of keeping a failure in business, even with financial backing, made no sense.  To wit:

Mr. Untermyer: If that is the rule of business, Mr. Morgan, why do the banks demand, the first thing they ask, a statement of what the man has got, before they extend him credit?

Mr. Morgan: That is what they go into; but the first thing they say is, "We want to see your record."

Mr. Untermyer: Yes; and if his record is a blank, the next thing is how much has he got?

Mr. Morgan: People do not care, then.

Mr. Untermyer: For instance, if he has got Government bond or railroad bonds, and goes in to get credit, he gets it, and on the security of those bonds, does he not?

Mr. Morgan: Yes.

Mr. Untermyer:. He does not get it on his face or his character, does he?

Mr. Morgan: Yes; he gets it on his character.

Mr. Untermyer: I see; then he might as well take the bonds home, had he not?

Mr. Morgan: Because a man I do not trust could not get money from me on all the bonds in Christendom.

I'm still working on an examination of Fed goals that transcend their stated directives of maximum non-inflation growth and thought this might make interesting reading in the meantime.


Saladin said...

What do you think of the Purported evidence of silver and gold manipulation at the CFTC hearings this week?

Dude said...

I've been working with GATA for almost 10 years, publishing on their site and helping behind the scenes.

Mr. Murphy will likely be to the $/Gold market what Mr. Chanos was to the Enron/$ market.

Saladin said...
This comment has been removed by the author.
Saladin said...

First, thanks for the rhetorical guidance for a while back, It really had an impact on me.

Read this, I wrote it.

Hope you like it.

Dude said...

If the guidance helped, it was because you had the courage of your convictions. Thank yourself (but I hear you, Bro.)

On the views from your article, perhaps there is an even more basic problem- confusion.

Here's Mr. Morgan trying to dispel some of the same confusion from the government's counsel.

Mr. Morgan: What I call money is the basis of banking.

Mr. Untermyer:. But the basis of banking is credit, is it not?

Mr. Morgan: Not always. That is an evidence of banking, but it
is not the money itself. Money is gold, and nothing else.