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Banking on Panic

By Sam Blumenfeld
Printed in Practical Homeschooling #89, 2009.

A history of financial crises in America and how we survived.
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Sam Blumenfeld


In May of this year I reached my 83rd birthday. I have spent the last thirty years promoting educational freedom and, in particular, home schooling. It is my strong belief that you cannot have a free society without educational freedom. A government education system simply creates the means for the government to indoctrinate the nation’s children in whatever philosophy the government wants. We have seen this scenario in operation wherever governments have wanted to impose totalitarian power over their citizens.

So far, in the United States, no political group has succeeded in imposing a totalitarian form of government over our people. Our separation of powers has made it difficult for any political group to achieve total power. Our Constitution guarantees our citizens freedom of speech, freedom of religion, and freedom to own firearms. In the area of education, Americans have the right to create private schools and to educate their children at home. As long as these freedoms are maintained by a vigilant citizenry, we shall not have a totalitarian system of government.

But recently we find government’s heavy hand intruding itself in areas where economic freedom is being hotly contested, particularly in the area of banking.

The function of banks in a free society is crucial to that society’s economic well-being. In the early days, before regulation, the banks stored savings in terms of gold and issued loans in their own banknotes. Credit is the essential fuel of economic progress. And so we must have it. But as in every human endeavor, banks and their depositors are also susceptible to error and fraud.

For example, our earliest banking panic, in 1810, was brought on by over-generous lending policies. Does that sound familiar? The Panic of 1837 resulted, with specie payments being suspended, causing many bank failures and a depression that lasted until 1844. In 1856, the Farmer’s Almanac published an extensive list of “Worthless and Uncurrent Bank Notes in New England.” Twelve banks in Boston alone were listed. Forty-one banks in Maine were listed as having worthless bank notes. Yet, the country survived.

There were bank panics in 1873, 1884, 1893, and 1907. During all these, the country survived without government intervention. But with the growth of a huge industrial economy, the large investment bankers in New York decided that what the United States needed was a European-style central bank. They held a secret meeting at Jekyll Island, GA, and mapped out a plan for getting Congress to create the Federal Reserve System. It would be sold to the American people as a means of preventing further financial panics. The law creating the Federal Reserve was passed in December 1913. In reality, the new central bank was nothing more than a cartel of the big national banks to control the financial system of the United States.

Thus we continued to have financial panics. There were 825 bank failures between 1914 and 1929 and 1,947 failures by the end of 1933. So, from 1913 to 1933, there were 12,714 state bank failures. By 1933 there were 14,771 banks in the United States, half as many as in 1920. The banking holocaust of the early 1930s—9,106 bank failures, 1,917 of them national banks, in four years—culminated in a nationwide bank moratorium in March of 1933, and the enactment of more government regulation.

And yet, our capitalist system survived. During the Depression many auto companies went out of business. But those that survived—like General Motors, Chrysler, and Ford—managed to produce cars the public wanted, at very moderate prices. The Depression had also created deflation, a lowering of prices on everything, since money was hard to get. The Empire State Building, the Chrysler Building, and Rockefeller Center were built during the Depression. Great bridges and highways were also built. And Hollywood did a booming business.

World War II got us out of the Depression and led the U.S. into its great post-war prosperity. Since then we’ve seen the growth of a huge consumer economy, spurred on by easy money provided by credit cards. And when money is easy to get, the greedy get greedier. The technological revolution created thousands of new millionaires. Ordinary Americans by the millions were investing in the stock market, in mutual funds, in retirement accounts. And to spread the American dream, Congress passed laws requiring banks to finance the mortgages of risky borrowers.

The result? A great financial blow-up, not seen since the Depression. But instead of letting the market sort things out, our leaders in the White House and Congress have decided to use this crisis as a pretext for destroying our capitalist system and imposing more socialist-style government control over our lives.

The nation has survived as a free society through all of the financial crises of the past. And it will survive this one, if it is allowed to follow its natural course. That is the lesson that history teaches us.

Education expert Sam Blumenfeld’s Alpha-Phonics reading program is available on www.samblumenfeld.net. His latest book, The Marlowe-Shakespeare Connection, is about the Shakespeare authorship mystery.

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