The U.S. has the world's most sophisticated financial system, populated by powerhouses like Goldman Sachs, Morgan Stanley, and Merrill Lynch. However, during the 1800s, things were much different. If anything, the U.S. financial system was a seat-of-the-pants enterprise, often resulting in booms, busts, and terrible depressions.
That era is the focus of H.W. Brands' excellent book The Money Men. He examines key events in the financial history of the U.S. and tries to answer some of our history's biggest fiscal questions: Should money be paper or gold? Or should it be backed by gold? And what about government regulation or a central bank?
The national bank
Alexander Hamilton, our first Treasury Secretary, spent a lot of time thinking and writing about these questions. He studied other financial systems and even read Adam Smith's writings.
In his day, the U.S. faced plenty of financial problems. Its currency was a mess ("not worth a Continental" was a popular phrase), and the growing national debt had ballooned to $79 million in 1790. To resolve these woes, Hamilton proposed an innovative solution: establish a national bank.
At the time, most Americans didn't go to a bank -- there were only four in the entire country. Thus, Hamilton's plan quickly attracted controversy, highlighting the intense struggle between capitalist and democrat factions with the new nation's government. Democratic leader Thomas Jefferson opposed to plan as a sop to the rich, believing it would bring more economic hardship upon farmers.
Ultimately, Hamilton's politically savvy prevailed. Over time, the national bank proved helpful for the U.S. economy, especially when the nation expanded westward. Still, Jefferson wasn't entirely wrong: The national bank was an elite institution that made some people very rich.
This wasn't acceptable to Andrew Jackson when he ascended to the Presidency in the 1830s. Jackson considered the national bank unconstitutional and withdrew deposits from the institution, causing a panic and depression. The bank's president, Nicholas Biddle, put up a fight, but it was useless. The national bank was dead.
Unintended consequences
Ironically, the absence of a central bank made it much easier for speculators and the wealthy to dominate the U.S. financial system. For example, during the Civil War, the North had to rely on financiers -- despite the imposition of a federal income tax. Merchant banker Jay Cooke had the brilliant idea of selling bonds to the masses, raising hundreds of millions for the war effort, and earning the title of "fiscal agent."
After the war, America underwent massive growth. A new class of "robber barons" such as Jay Gould and James Fisk emerged. At one point, both of them teamed up with the brother-in-law of President Ulysses Grant to corner the gold market. The scheme failed, but it still caused a financial panic known as "Black Friday."
Unfortunately, the boom/bust cycle was the norm for the U.S. financial system. The main stabilizing factor became a single man: the extremely powerful financier J.P. Morgan, who bailed out the federal government on several occasions.
Confronted with these problems, capitalists and democrats finally agreed on the need for change -- prompting the 1913 creation of the Federal Reserve.
In conclusion ...
Brands' book points out how, even in a democracy, compromise can take decades, with a lot of economic turmoil in the meantime. At only 206 pages, it's a quick read, but Brands does a thorough job covering the pivotal events in the battle over money. And the juicy anecdotes he sprinkles throughout the book make it much more than just another dry historical account.
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Fool contributor Tom Taulli does not own shares of companies mentioned in this article. The Fool has a disclosure policy.