"The Fast Death and the Slow Death"
by Jay Martin
Excerpt: "Every central bank in history, when forced to choose between a fast death and a slow death, chooses the slow death. Let’s get into it.
The Library On Madison Avenue: On the morning of October 22, 1907, a line of frightened New Yorkers stretched around the block at the corner of Fifth Avenue and 34th Street. They were holding bankbooks. They were waiting to pull their savings from an institution called the Knickerbocker Trust, the third-largest trust company in New York, where they had collectively deposited what would today be the equivalent of about half a billion dollars. By 12:30 in the afternoon, the trust had paid out everything it had - roughly eight million dollars in cash - and locked the doors. The president of Knickerbocker, a man named Charles Barney, walked home. Three weeks later, he shot himself.
From the Knickerbocker, the panic spread. Other trusts faced runs. The New York Stock Exchange nearly closed because banks ran out of cash to fund routine margin trades. The Dow Jones had already lost almost half its value over the preceding year. And here is the part that matters. The part that built the world we are living in right now. There was no Federal Reserve. There was no central bank. There was no entity in the entire United States whose job it was to step in and stop the financial system from collapsing on itself. So one man did it.
John Pierpont Morgan was seventy years old, semi-retired, and one of the wealthiest men alive. When the panic broke, he was at a church convention in Virginia. He cancelled his plans, boarded a special train back to New York, and went to work. For the next two weeks, he ran the rescue of the United States financial system out of his personal library on Madison Avenue.
He called the heads of every major New York bank to his home. He locked the doors of the library and told them they were not leaving until they pooled enough cash to backstop the system. He personally examined the books of the troubled trusts and decided which ones were solvent enough to save and which had to be allowed to fail. He coordinated roughly twenty-five million dollars in emergency loans - a staggering sum at the time. He sorted the wreckage in front of him into two piles. The patients he could save, he saved. The patients he could not save, he let die.
It worked. The panic was contained. The financial system survived. But take a step back and look at what had just happened. The largest economy on Earth had just been saved from collapse by an elderly private banker performing triage in his own library.
Morgan held no charter, no mandate, no government authority. He had cash, credibility, and the willingness to use them. If he had been in Europe, sick, dead, or simply uninterested in being a hero, the United States might have crashed in a way no one in this century has ever seen. The country drew the obvious conclusion. It could not keep relying on one rich man to save it.
Post Morgan: Three years later, in November 1910, a small group of men boarded a private railcar at a station in Hoboken, New Jersey. They were travelling under assumed first names. They had been told to dress for hunting. They were carrying drafts of legislation that the United States Congress had not yet seen. The men were Senator Nelson Aldrich, an assistant secretary of the Treasury, and four senior bankers - including representatives of the houses of Morgan, Kuhn Loeb, and what is today Citibank.
Their destination was a hunting club on Jekyll Island, off the coast of Georgia, owned by Morgan himself. The cover story was a duck-hunting trip. The actual purpose was to draft, in secret, what would become the Federal Reserve Act. Three years after that, on December 23, 1913, President Woodrow Wilson signed the Federal Reserve into law. A new institution that had power to do, on demand, what Morgan had done by hand.
When banks ran short of cash, the Fed could create new cash and lend it to them. When markets froze, the Fed could thaw them. When the system needed liquidity, the Fed would produce it. That is the founding mission of the Federal Reserve. It exists, in its bones, to prevent another Knickerbocker. To do triage on the financial system in the moments when no one else can.
For over a century, it has done that job well. We have not had another 1907. And the panics of 1987, 1998, 2008, and 2020 have been met with the same medicine. The Fed steps in, creates dollars and buys what no one else will buy. The patient stabilizes.
But there is a question Morgan never had to ask in his library. And it is the question that defines our entire present moment. What does the medicine cost?"
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