Nothing New Under The Sun

Studying history, including economic history, is quite odd. Maybe I'm crazy, but I see parallels almost everywhere I look.

As I've written before, one of my research projects is on the Panic of 1907. In many ways, it resembles our recent economic crisis. For me, the most startling resemblance is the absolute fear that the monetary authority had about any contraction in the credit market1.

Before 1907, since there was no Federal Reserve, the Treasury decided to act like a modern central bank. Facing a slowdown in economic activity, Treasury Secretary Shaw made some policy changes. Quoting from an academic article at the time1:

Until within the last decade [1898-1908], also, the treasury had never ventured to intervene in the money market, except in moments of really great distress, such as the outburst of an unreasoning panic.

Nor had any secretary ever attempted, or probably ever thought of attempting, to render the currency responsive to the changing needs of trade by deliberate manipulation of the public funds.

For the first time the treasury's policy appears to be influenced by the rate of interest prevailing in the financial centers, and by the condition of the stock market.

With him it became the avowed endeavor of the department to check every incipient stringency, and to prevent any contraction of credit, no matter what might have been its cause.

By the end of 1902, Mr. Shaw had increased the amount of deposits at banks to $150 million. This is at a time where total money in the United States was around $2.5 billion.  Again, this is not during the height of the Panic, where the Treasury was acting as a lender of last resort. No. This was during a normal downturn in the economic.

On August 27, 1903, Mr. Shaw announced that, according to his ruling, money could be transferred en bloc from the treasury vaults to the banks, and that he had on hand about thirty-eight millions available for that purpose. In other words, he announced to the banks before any panic had occurred, that he intended to assist them if they were in need, and that he was ready to assist them upon a scale never before conceived possible.'

In 1906, trying to hold off the inevitable correction, Mr. Shaw announced that the Treasury would deposit government money with any bank that imported gold. This amounted to $49 million deposited in New York banks, $31 million in National City Bank alone. In September, another $44 million were poured in. Again, think of the total amount of money in the economy at the time.

The Treasury literally just gave government money to the banks to hold. That makes quantitative easing look like a joke.

Nearly a billion dollars had been added to our supply of gold and about three hundred millions to our bank circulation, which meant an average annual increase for ten years of about one hundred and thirty millions. A considerable part of this increase had passed into bank reserves and had naturally formed a basis for enlarged credit.

Secretary Shaw just could not understand the role of credit in coordinating production. That might be excusable. Mises and Hayek hadn't formulated their theories of the boom/bust. 1902-1907 might be excusable. 2002-2007? You decide.

But remember, since there were recessions and banking panics before the Fed, a "free-market" in credit cannot work...


1. Andrew, A. Piatt. 1908. “The United States Treasury and the Money Market. The Partial Responsibility of Secretaries Gage and Shaw for the Crisis of 1907.” American Economic Association Quarterly 9, no. 1 (April): 210–231.

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