The Mystery of Banking

lender of last resort
, a federal
governmental Santa Claus who would always stand ready to bail
out banks in trouble. Furthermore, a central bank was needed to
provide 
elasticity
of the money supply. A common complaint by
230
The Mystery of Banking
11
Irwin Unger, 
The Greenback Era: A Social and Political History of
American Finance, 1865–1879 
(Princeton, N.J.: Princeton University Press,
1964), pp. 46–47, 221.
Chapter Fifteen.qxp 8/4/2008 11:38 AM Page 230

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bankers and by economists in the latter part of the national
banking era was that the money supply was 
inelastic
. In plain
English, this meant that there was no governmental mechanism to
assure a greater expansion of the money supply—especially dur-
ing panics and depressions, when banks particularly wished to be
bailed out and to avoid contraction. The national banking system
was particularly inelastic, since its issue of notes was dependent
on the banks’ deposit of government bonds at the Treasury. Fur-
thermore, by the end of the nineteenth century, government
bonds generally sold on the market at 40 percent over par. This
meant that $1,400 worth of gold reserves would have to be sold by
the banks to purchase every $1,000 worth of bonds—preventing
the banks from expanding their note issues during a recession.
12 
In addition to the chronic desire by the banks to be subsidized
and cartelized more effectively, the large Wall Street banks, by the
end of the nineteenth century, saw financial control of the nation
slipping away. For the state banks and other non-national banks
had begun to grow faster and outstrip the nationals. Thus, while
most banks were national in the 1870s and 1880s, by 1896 non-
national banks constituted 61 percent of the total number, and by
1913, 71 percent. By 1896, moreover, the non-national banks
held 54 percent of the total banking resources of the country, and
this proportion had grown to 57 percent by 1913. The inclusion
of Chicago and St. Louis as central reserve cities after 1887 further
diluted Wall Street’s power. With Wall Street losing control and no
longer able to cope, it was time to turn to the United States gov-
ernment to do the centralizing and cartelizing with Wall Street
exerting effective control of the monetary system through the
power of Washington.
13
Central Banking in the United States III
231
12
On agitation by bankers and others for the substitution of a central
bank for the national banking system, see among others, Robert Craig West,
Banking Reform and the Federal Reserve, 1863–1923 
(Ithaca, N.Y.: Cornell
University Press, 1977).
13
See Gabriel Kolko, 
The Triumph of Conservatism: A Reinterpretation
of American History, 1900–1916
(Glencoe, Ill.: The Free Press, 1963), p.
140.
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In addition to the bankers, economists, and businessmen,
politicians and political parties were all ripe for a shift to a cen-
tral banking system. Economists participated in the general intel-
lectual shift in the late nineteenth century from 
laissez-faire
, hard
money, and minimal government to the new concepts of statism
and big government imbibed from Bismarck’s Germany. The new
collectivist spirit became known as 
progressivism
, an ideology also
embraced by businessmen and politicians. Having failed to
achieve monopoly positions on the free market, big businessmen,
after 1900, turned to the states and especially to the federal gov-
ernment to do the subsidizing and cartelizing on their behalf. Not
only that: The Democratic Party in 1896 lost its century-long sta-
tus as the champion of