Today, many borrowers are upset that their pension funds are getting low
returns as a result of the Federal Reserve monetary stance of keeping interest
rate near zero while the old mortgages taken out two years ago keep rates fixed
at high levels. They have strong incentives to default on their mortgage loans.
Populism reduced to a sectional movement
The 1892 election showed US populism reduced to mostly a sectional movement.
Democratic candidate Grover Cleveland, having lost the White House in 1888 to
Republican Benjamin Harrison despite a popular vote majority but a 168 to 233
electoral votes, recaptured the presidency from Harrison with both a popular
vote and electoral majority. People's Party candidate James B Weaver won
1,041,028 popular votes and 22 electoral votes, all from states west of the
95th meridian, with support mostly from Western farmers and miners. Populist
appeal to Northern industrial labor was not successful.
The long-term impact was the growth of populist influence within the two major
parties. Populist candidates ran on Democratic and Republican tickets. The most
notable was John P Altgeld, a German immigrant who became Democratic governor
of Illinois, giving the state a progressive administration. Shortly after the
1892 election, the country plunged into a severe and long depression in which
unemployment grew to over 4 million, or 18.4%, with double-digit unemployment
from 1893 to 1899. (See
The Shape of US Populism, Asia Times Online, March 2008. )
Progressivism and the Federal Reserve
The Progressive Movement in US politics emerged during the first decade and a
half of the 20th century out of the intellectual and political ferment of final
two decades of the 19th century. It was primarily a reform movement represented
in national politics by two presidents: Theodore Roosevelt and Woodrow Wilson.
Progressives were against the growth of political corruption and a captured
government that favored organized wealth at the expense of the general public.
Progressives of this era believed in the ideals of democratic government,
individual liberty, the rule of law and the constitutional protection of
private property. But they argued that the maintenance of these ideals in the
new industrial era required new political procedures and governmental
Progressives emphasized traditional ethical and humanitarian values of fairness
and equal opportunity. Marxist concepts of class struggle were inoperative for
US conditions as the concept of class never took hold in US political
discourse. American politics revolved around economic issues outside of the
class context. Almost all giants of industry in the US had worked their way up
as young apprentices from the factory floors or as errand boys for big banks.
The American Revolution had cut European imperialism on US soil at its root at
the founding of the new nation. Not being a victim of imperialism, the US as a
nation did not feel oppressed by capitalism.
Most socialists in the US were later immigrants from Europe who landed in urban
ghettos and never experienced first-hand conditions that naturally supported
Jeffersonian democracy. In the half century between 1870 and 1920, the US
absorbed 26.3 million immigrants, more than three times as much as during the
whole of the previous two and a half centuries. After 1890, unlike immigrants
who came earlier, who were generally economically self-sufficient and
culturally advanced and educated with professional skills, the new immigrants
tended to come from the lower classes of less-developed countries of Europe.
A good number of the new immigrants in urban ghettos failed to find the
economic liberation they had hoped to be waiting for them in their new home.
Some with more financial resources went on to rural areas in Pennsylvania and
the Midwest and did better. The successful immigrants, usually ones with
education or disciplined drive, qualities the lower classes in the old
countries were generally deprived of, provided concrete, albeit token evidence
of a classless society in the new land.
Progressives at first were mostly reformers in city politics, as their
influence on the national level was limited. Reformer Tom Johnson of Cleveland
had made a fortune as a streetcar owner and he became interested in the reform
movement through the writings of Henry George. Johnson became mayor of
Cleveland in 1901 and served until 1907 to make Cleveland the best governed
city in the nation. But despite the efforts of reformists, other big cities
such as New York, Chicago and Philadelphia continued to be governed by corrupt
On the state level, John P Altgeld in Illinois and Hazen S Pingree of Michigan
were accomplished reformers. But the champion was Robert M LaFollette of
Wisconsin, whose progressive governance came to be known as the Wisconsin idea,
which influenced a block of Midwestern farm states that included Iowa,
Minnesota, Kansas, Nebraska, and the Dakotas. In New York, Charles Evan Hughes
won the governorship based on his investigation as attorney general of
corruption in big insurance companies. Hughes' path of political success was
followed by Mario Cuomo, Elliot Spitzer and possibly Andrew Cuomo, the present
New York State attorney general. Hughes went on to be secretary of state and
Chief Justice of the Supreme Court. In New Jersey, Woodrow Wilson went from the
governorship to be the 28th President on March 4, 1913.
In the US, the spring of 1910 saw the Progressives winning a major victory in
the mid-term election of the William Howard Taft presidency for seats in the
House of Representatives. In the election of 1912, Democratic candidate Woodrow
Wilson, a leading Progressive intellectual, won the presidency with only 43% of
the popular vote, but carried 40 states due to the split of the Republicans
between Progressive Theodore Roosevelt and conservative William Howard Taft.
The election also marked the greatest relative strength achieved by socialism
in US political history. Socialist candidate Eugene Debs received 6% of the
vote, a record not since reached by other socialist candidates. During the Cold
War, socialists were officially viewed in the US as national security risks.
While Progressives wanted to reform the political regime by having government
assume broader responsibility for economic affairs, they differed in how this
objective could be achieved. One group as represented by Theodore Roosevelt
accepted the growth of big corporation was an inevitable economic trend and
that government should regulate them rather than dissolve them. Another group
as represented by Woodrow Wilson laid more emphasis on prohibiting monopoly,
protecting small businesses and promoting and enforcing competition and
nurturing innovation. The fundamental question harks back to the
Jefferson-Hamilton dispute and later in the debate over the New Deals and today
on the direction of regulatory reform to prevent future financial crises.
The rise of Muckrakers, a derogatory name given to investigative journalists
and reform writers by Teddy Roosevelt at one of his frequent moments of
irritation, helped to drive the progressive movement. Henry Demarest Lloyd
wrote in 1894 a fierce denunciation of trusts in Wealth Against Common Wealth.
The popular low-price McClure's magazine ran "The Shame of the Cities" (1902),
an expose on corruption in city government, "The Struggle for Self-Government"
(1906) and "The Traitor State", which criticized New Jersey for patronizing
incorporation, all by editor/writer Lincoln Steffens, and Ida Tarbell's
articles that later was published as History of the Standard Oil. Upton
Sinclair's The Jungle (1906), a report of the meat-packing industry was
influential in enabling the reformers to bring about the Meat Inspection Act of
In his first term as president, Wilson helped persuade a Democratic Congress to
pass the Federal Reserve Act of 1913, the Clayton Antitrust Act and the Federal
Farm Loan Act. Wilson also established the Federal Trade Commission. Wilson
signed the first-ever federal progressive income tax into law in the Revenue
Act of 1913 to make up for revenue lost by the reduction of tariffs.
A Northern progressive Democrat, Wilson nevertheless brought many white
Southern Democrats into his administration, and tolerated their expansion of
segregation in many federal agencies and in Washington DC, a practice later
forbidden by the Civil Rights Act of 1964, a legislation introduced by
Democratic president John F Kennedy in his civil rights speech of June 11,
1963, in which he asked for legislation "giving all Americans the right to be
served in facilities which are open to the public - hotels, restaurants,
theaters, retail stores, and similar establishments," as well as "greater
protection for the right to vote". President Lyndon B Johnson signed it into
law in 1964.
The US military was segregated until after World War II when Harry S Truman
signed an executive order to desegregate the army, but actual integration did
not take place until the Korean War after the segregated Eighth Army suffered a
disastrous setback and the field commander, in desperate need for replacements,
accepted black soldiers to fight along side white ones. In the US Navy, first
lady Eleanor Roosevelt's push for an integrated navy was ridiculed by navy
brass as "Eleanor's folly".
The 1964 Civil Rights Act emulated the Civil Rights Act of 1875, which was
introduced by Republican Senator Charles Sumner and Republican Congressman
Benjamin M Butler, and signed into law of Republican president Grant but
declared unconstitutional by the Supreme Court in 1883.
The first presidential task Wilson presented to congress was a revision of the
high tariff policy. Yet it was not a move towards globalization. Wilson sought
to use foreign competition to break up US big business from its monopolistic
hold on the economy.
The Republicans in Congress passed the Morrill Tariff Act, which was signed
into law by Democrat James Buchanan in March 1861, a few days before Abraham
Lincoln took office. The Act marked the first increase in tariffs since 1842.
During the war, there were further rises in ad valorem import duties, with the
average reaching 47%. The primary purpose was to raise revenue for war
spending, but the high tariffs also protected domestic industry from superior
foreign competition. Domestic industries succeeded in keeping tariffs high
after the war even though government revenue was no long an issue. Throughout
most of its economic history, the US benefited from protectionism until the US
economy became a dominant power. Free trade was not decidedly a US policy until
after World War II.
The Underwood Tariff became law in October 1913, eliminating import duties on
more than 100 articles and reducing the average rate of more than 1,000 others
to 27% from 37%. In order to compensate for the loss of federal revenue from
tariffs, an income tax was introduced. The constitutionality of an income tax
had been recently authorized by the Seventeenth Amendment passed by the senate
on June 12, 1911, and by the House of Representatives on May 13, 1912. It was
ratified by the states by April 8, 1913.
However, the anticipated economic effect of the tariff reduction on US
competitiveness could not be assessed by actual data because international
trade was disrupted by the outbreak of World War I in 1914. War monopoly
strengthened the US economy in manners that free-market competition could not.
The open and reform policy introduced by Deng Xiaoping in China in 1978 also
included in large measure the objective of using foreign capital from advanced
Western economies to break up the stagnant monopoly enjoyed by inefficient
state-owned-enterprises operating under uninspired management in the context of
socialist central planning, as the government struggled to revive a backward
economy greatly weakened by three decades of US embargo following a century of
Western imperialistic exploitation.
Over a span of three decades since 1978, the open and reform policy succeeded
in energizing the Chinese socialist economy. Yet it has unleashed a host of
collateral socioeconomic problems such as income disparity, developmental
imbalances and environmental deterioration that may take subsequent leaders
decades to correct. The current global financial crisis in market economies is
also causing China to reexamine its blind rush towards a market economy.
President Woodrow Wilson fundamentally altered the monetary system of the US by
establishing the Federal Reserve System when he signed into law the passage by
congress of the Glass-Owen Federal Reserve Act of 1913. The main objective of
establishing a central bank was to provide monetary elasticity in support of a
growing economy. Prior to the establishment of the central bank, the system set
up by the National Bank Act of 1863 left the money supply tied to the amount of
government bonds held by banks, with no direct relationship to the monetary
needs of the economy. A central bank was expected to manage the money supply to
serve the needs of the economy and to control inflation by setting interest
Monetary reform had long been demanded by farmers who saw the National Bank Act
of 1863 as having failed to protect their interests by allowing Northeastern
banks a) to keep money scarce when farmers needed loans to finance their spring
planting, by keeping interest rates high in the farm belts in the South and
West, and b) to keep money scarce in autumn when farmers brought their harvest
to market, to keep farm produce prices low. In between, banks would ease the
money supply so that general inflation would eat away the purchasing power of
the sales proceeds of farm produce.
Farmers wanted a central bank not controlled by the private bankers in the
Northeast along Hamiltonian lines but controlled by government along Jacksonian
populist tradition, and decentralized away from the money elite of the
Wilson set up 12 regional Reserve Banks to balance regional interests and to
serve seasonal needs, to be supervised by a Federal Reserve Board in Washington
in the context of a national monetary policy.
One of the outcomes of government bailout of big banks in the current financial
crisis that started in 2007 may be that a large number of the more than 8,000
small community banks will be absorbed by four super banks. JPMorgan Chase is
now, in 2010, reportedly holding more than $1 of every $10 on deposit in the
US. The four biggest super banks (JPMorgan Chase, Bank of America, Wells Fargo
and Citibank) now issue one of every two mortgages and about two of every three
credit cards in the US.
Since the financial crisis began in mid-2007, these four super banks have been
allowed each to hold more than 10% of the nation's deposits, having been
exempted from a longstanding rule barring such market dominance by any one
single bank. In several metropolitan regions, these new super banks are now
permitted to take market share beyond what the Department of Justice's
antitrust guidelines previously allowed.
The American banking system is now one of a handful of large global
conglomerate of hedge funds pretending to be banks, taking huge profit from
high-risk proprietary trades with government-backed money, instead of a bank
being one of a network of small conservative local institutions serving their
domicile communities merely as intermediaries of money through local deposits
for nominal fees. In 2009, the 10 largest banks in the US accounted for 60% of
all banking assets, up from 26% 20 years ago.
Progressive are promoting the break-up of big banks as institutions that serve
no good social purpose and to prevent big banks from exploiting the too-big-to
fail syndrome to hold the economy and tax payer hostage.
Latest Federal Deposit Insurance Corp data reveal that the new super banks now
can borrow more cheaply than their smaller peers because creditors assume these
too-big-to-fail institutions to be failsafe. This trend will leave the
financial market dominated by a gigantic trust of interlocking super banks.
Such a concentration of market share will hurt consumers in two ways. It will
keep the cost of credit high to borrowers for lack of competition even when the
cost of funds for banks remains artificially low. It will also force regulators
to push bank reserves upward, to force banks to pass on the cost to borrowers.
Worse, such a gigantic monopolistic trust of large interlocking super banks
will lead to a financial structure too big to save without voiding the normal
characteristics of a market economy.
Next: Public debt and other issues
Henry C K Liu is chairman of a New York-based private investment group.
His website is at http://www.henryckliu.com.