A broadside version of Washington’s Farewell Address, first published 215 years this week. Feedloader (Clickability)

The Real Birth of American Democracy

When the lofty ideals of the Constitution passed their first test!

The dawn of American democracy didn’t come in 1776,

with the Declaration of Independence.

It didn’t come in 1788, when the Constitution was ratified by the states, or in 1789, when George Washington took office. According to Harry Rubenstein, chair and curator of the Division of Political History at the American History Museum, the symbolic birth of our system of government didn’t come until its noble ideals were actually put to the test. On September 19, 1796, 228 years ago, Washington published his farewell address, marking one the first peaceful transfers of power in American history and cementing the country’s status as a stable, democratic state.

This moment, Rubenstein says, “is crucial for creating the in-and-out system of government that we have. And this is unique. In that time and era, politicians would gain power, or kings would stay in office until they die.” At that nascent stage in American history, before precedents such as the two-term limit were even set, many were uncertain about what would happen after a galvanizing figure like Washington resigned office. But at this critical juncture, the leadership of Washington and others proved more than adequate to preserve democracy. “Stepping down is unique,” says Rubenstein. “It’s a powerful statement about Washington and American democracy.”

In addition to the symbolic importance of voluntarily leaving office, the content of Washington’s farewell address—which was published in newspapers across the country and as a pamphlet—was important in establishing the values of the quickly maturing American democracy. The 51-paragraph document covered Washington’s decision to retire, the importance of a unified national government, the folly of getting involved in foreign affairs and other issues.

“What the farewell address aims to do is call for national unity: an end to the squabbling between the parties, between Federalists and Republicans, and an end to the sectionalism of West, North and South,” Rubenstein says. “It’s a call for trying to form something larger than local interests.” For an infant nation that had resembled more of a loose association of independent states under the Articles of Confederation just years earlier, this message of unity was significant.

The candle holder Washington used in writing the address.

Photo courtesy American History Museum

Of course, Washington’s lofty written standards weren’t always achieved in real life.

“I think his desire for national unity, while hard for people to act on, was something that most aspired to,” says Rubenstein. “It’s just that everyone wanted everyone else to agree with their position.” Even during Washington’s presidency, the buildup of partisan politics that would characterize our government was beginning. “You start to have the birth of the parties, especially during his second administration: the squabbling between the two parties, between Hamilton and Jefferson,” Rubenstein says.

But Washington’s core message would remain at the heart of the public conception of the country as a unified nation. “His intention is to urge people to put aside their differences, and not get caught up in the squabbles of the international community,” says Rubenstein. “As an administrator, he was witnessing all these tugs and pulls, and so this is his last major statement. These are the beliefs that he’s hoping people will follow.” The importance of checks and balances, the danger of foreign alliances, the authority of the Constitution, and the need for national unity were adopted with conviction in the years to follow by legislators across the political spectrum.

The American History Museum is home to a critical relic of the farewell address.

“According to family tradition,” Rubenstein says, “Washington worked on his farewell address by the light of this candle stand.” During the pre-electric era, candle stands with reflectors were often used to increase the light output of a candle at night, and were used on desks in a manner similar to a reading lamp. This brass stand was passed down among Washington’s descendants before being sold to the government in 1878.

A Locked Door, A Secret Meeting And The Birth Of The Fed

BookTV: G. Edward Griffin, “The Creature from Jekyll Island” (youtube.com)

G. Edward Griffin sat down with Book TV at FreedomFest in Las Vegas to talk about his book, “The Creature from Jekyll Island,” which is a history of the creation of the Federal Reserve System. FreedomFest, which is held annually in Las Vegas, is the largest libertarian conference in the country.

At the time, the U.S. government had no way to deal with the panic. There was no institution that could step in to stop the run on healthy banks. So the job of stopping the panic fell to one man: J.P. Morgan (of JPMorgan fame).

In 1907, the U.S. economy was in the grip of a financial crisis.

Unemployment was up. The stock market was down.

People started panicking. They were lining up overnight to pull their money out of healthy banks. This can be deadly for an economy: Healthy banks have to shut down, businesses can’t get credit, they lay people off, and the economy gets worse. He summoned dozens of the leading financiers in New York to his private library on Madison Avenue and essentially ordered them to contribute to a $25 million pool that would be used to backstop the system. Then he locked them in and made them stay there through the night, until they all agreed to his plan.

The plan worked — it essentially ended the Panic of 1907.

But some powerful people in Washington wondered: What about the next panic?

Do we really want the fate of the U.S. economy to hinge on one rich guy in New York?

One person in particular decided this was a problem: Sen. Nelson Aldrich, chairman of the Senate finance committee. Aldrich knew there was something America could do so that it would no longer have to rely on one guy to end panics: The U.S. could create a central bank.

This was not a new invention. Countries in Europe already had central banks. And, during panics, the central banks basically did what J.P. Morgan did in the U.S.: act as lenders of last resort for healthy banks. When depositors were lined up out the door yelling for their money, banks that were basically sound could borrow from the central bank.

But just consider that name: central bank. Throughout American history, both of those words — “central” and “bank” — had been deeply unpopular. The thought of a bunch of rich bankers in New York controlling a powerful central bank did not inspire confidence.

Still, Aldrich realized he needed bankers’ help to draw up a plan for a central bank.

So he came up with a plan to gather in secret.

He told a handful of New York bankers to go on a given night, one by one, to a train station in New Jersey. There they would find a private rail car hitched to the back of a southbound train. To conceal their identities, Aldrich told the bankers to come dressed as duck hunters and to address each other only by first name.

The train headed south, and the bankers got off in Georgia. They spent the next week holed up in a private club at a place called Jekyll Island. (Apparently, the name didn’t sound as sketchy then as it does today.)

The Meeting at Jekyll Island | Federal Reserve History

In November 1910, six men – Nelson Aldrich, A. Piatt Andrew, Henry Davison, Arthur Shelton, Frank Vanderlip and Paul Warburg – met at the Jekyll Island Club, off the coast of Georgia, to write a plan to reform the nation’s banking system. The meeting and its purpose were closely guarded secrets, and participants did not admit that the meeting occurred until the 1930s. But the plan written on Jekyll Island laid a foundation for what would eventually be the Federal Reserve System.

The Need for Reform: The Secret Meeting That Created the Federal Reserve:

Unveiling Jekyll Island’s Mysteries. (youtube.com)

At the time, the men who met on Jekyll Island believed the banking system suffered from serious problems. The Jekyll Island participants’ views on this issue are well known, since before and after their conclave several spoke publicly and others published extensively on the topic. Collectively, they encapsulated their concerns in the plan they wrote on Jekyll Island and in the reports of the National Monetary Commission.

Like many Americans, these men were concerned with financial panics, which had disrupted economic activity in the United States periodically during the nineteenth century. Nationwide panics occurred on average every fifteen years. These panics forced financial institutions to suspend operations, triggering long and deep recessions. American banks held large required reserves of cash, but these reserves were scattered throughout the nation, held in the vaults of thousands of banks or as deposits in financial institutions in designated reserve and central reserve cities.

During crises, they became frozen in place, preventing them from being used to alleviate the situation. During booms, banks’ excess reserves tended to flow toward big cities, especially New York, where bankers invested them in call loans, which were loans repayable on demand to brokers. The brokers in turn loaned the funds to investors speculating in equity markets, whose stock purchases served as collateral for the transactions. This American system made bank reserves immobile and equity markets volatile, a recipe for financial instability.

At Jekyll Island, Aldrich and the bankers came up with a plan. They knew many Americans thought a central bank could become too powerful, too influential in the economy. So they came up with a classic American workaround: They decided the U.S. should create lots of little central banks, scattered all around the country.

The plan they came up with still had a long way to go. It got shot down the first time in Congress. The plan for a central bank was debated, changed significantly, and renamed. But the basic idea held up. And on Dec. 23, 1913, President Woodrow Wilson signed the Federal Reserve Act into law.

Creating the Fed didn’t solve the nation’s economic problems.

In fact, a few decades after the Fed was created, its policies made the Great Depression worse. And the Fed has changed significantly over the course of a century. But even after all those changes, there are still a dozen Federal Reserve banks scattered around the country in cities like Dallas, Richmond and, of course, New York.

The Meeting at Jekyll Island | Federal Reserve History

The United States Federal Reserve has received a good deal of flack over the years. Whether it’s ire over looming interest rate hikes or full-blown conspiracy theories, the Fed is perpetually at the center of a debate in America and abroad.

We haven’t always had the Fed to kick around — or to save our economic hides, depending on how you see it. But secrecy has been a part of the Federal Reserve (what is Janet Yellen thinking?) since its beginning.

6 bankers of Jekyll Island – Search (bing.com)

The birth of the Fed is the subject of “America’s Bank: The Epic Struggle to Create the Federal Reserve.” Author Roger Lowenstein told Marketplace’s Kai Ryssdal just how difficult it was for the Fed’s architects to draft plans for a U.S. central bank.

On secrecy:

Back then, the people who wanted to create the Federal Reserve couldn’t even admit that that’s what they were doing. They had all kinds of disguised names for it. They went off on fake hunting trips to disguise their purpose. It was just anathema to the body of politics then.

On the “hunting trip” to Jekyll Island … and conspiracy theories:

You gotta hand it to the conspiracy theorists, because, in fact, there was a conspiracy…

I call it a patriotic conspiracy, but there was a senator from Rhode Island, a guy named Nelson Aldrich…. Late in his career, he decided we needed a central bank. So, he organized — now I’m not making this up, it doesn’t come from Warner Bros. studio or anything —

He organized a faux hunting trip to an island off the coast of Georgia [Jekyll Island] where there was an exclusive resort where J.P. Morgan was a member. [Morgan] made sure there was no one else in the club. And the senator, three bankers, the assistant secretary of the treasury — who, by the way, didn’t tell his boss — went down there for a week. They were plied with wild turkey, quail, stuffed oyster. They wrote what became the first draft of the Federal Reserve Act.

On how financial turmoil in the early 20th century led to the Federal Reserve Act:

There had been a financial panic, and there had been a banking panic. So what happened in 1907 was that every bank stopped lending. People ran to their banks. And in that day and age, I really mean ran to the banks…. And what do you know, the banks didn’t have the funds to loan them… America had just a series of panics, money shortages, squeezes and, not infrequently, full-fledged depressions. So that was why they thought — as did every country in Europe — the U.S. needed a central bank.

On what would have happened if there wasn’t a Federal Reserve:

I could say that we wouldn’t have had the Federal Reserve to help us through the Depression, but the Federal Reserve wasn’t much of a help during the Great Depression. So, they kind of blew it. If you get to 2008, I think things would really get interesting, because we had five, six banks failing. Those five, six banks would have become 10, would have become 30, would have become thousands. It’s very easy to see 2008 steamrollering into another Great Depression.”

Read an excerpt from “America’s Bank: The Epic Struggle to Create the Federal Reserve” below:

Introduction

So pervasive is its influence that Americans today can scarcely imagine a world without the Federal Reserve. To begin with, the Fed—America’s central bank—issues the Federal Reserve notes that we call “money.” It sets the short-term interest rate that affects the market for mortgages, car loans, corporate debt, and even the level of the stock market.

It manages, sometimes adroitly and sometimes wan tingly, the supply of credit whose ebb and flow alternately buoys and batters’ business. It supervises—or it is supposed to supervise—the nation’s banks. And as Americans were vividly reminded during the meltdown of 2008, the Federal Reserve acts as the lender of last resort, providing loans to banks when credit shuts down.

Barely a century ago, the Fed did not exist. Every other industrialized nation had such a central bank to oversee its banking system and to assure stability, yet America’s financial system—if system one can call it—was antiquated, disorganized, and deficient. The United States boasted the world’s largest economy, its vast territory was ribboned with railroad tracks and telephone wires, its cities were bursting with factories churning out iron and steel. Yet, almost as if history had missed a turn, its banks were disconnected and isolated, left to prosper or flounder (or fail) according to the reserves of each individual institution.

As Paul Warburg, one of the heroes of this story, was to observe with his trademark acuity, America’s banks resembled less an army commanded by a central staff than they did an inchoate legion of disjointed and disunited infantry. It was hardly surprising that throughout the latter half of the nineteenth century and into the early twentieth, the United States—alone among the industrial powers—suffered a continual spate of financial panics, bank runs, money shortages, and, indeed, full-blown depressions.

This book tells the story of how, culminating in the days before Christmas 1913, the Federal Reserve came to be. It was not a gentle or an easy birth, nor was it swift. To Americans of the early twentieth century, especially farmers, the prospect of a central bank threatened the comfortable Jeffersonian principle of small government. To a people for whom local autonomy was sacrosanct, the notion of a powerful bank, joined to the even more powerful federal government, was deeply unnerving. Opposition to central authority had animated the minutemen at Lexington and Concord, and the battle to establish the Fed resembled a second American revolution—a financial revolution.

America had, of course, experimented with central banking early in its history. After the War of Independence, a military success but a financial disaster, the government was saddled with debt. When in due course the Constitution was ratified, providing a greater degree of political unity, Alexander Hamilton proposed a financial equivalent, a Bank of the United States, modeled after the Bank of England. Thomas Jefferson was mightily opposed, as were his many followers. Nonetheless, President Washington was persuaded, as was a majority of Congress, and in 1791, the Bank, headquartered in Philadelphia, opened for business.

To modern eyes, the Bank was a strange beast, 20 percent owned by the government and 80 percent by private investors. It was authorized to hold the government’s deposits but not, specifically, to be the nation’s monetary steward or to perform other functions of a central bank. Nonetheless, the Bank began to play this role. In particular, it strengthened the previously shoddy credit of the federal government. The twenty years of its initial charter were generally prosperous, and the number of private banks, which received charters from the states, swelled from five to more than one hundred.

But the Bank was doomed by the rise of the anti-federalists, both in the White House, in the person of James Madison, and in Congress. Rechartering failed by one vote in each chamber. Thus, in 1811, America was returned to a condition of monetary innocence, or laissez- faire, money again being the business of individual banks in the states, each of which issued notes according to its respective powers. Inflation followed, and when the government’s credit became overtaxed by the War of 1812, banks suspended operations, causing Madison to rethink matters. In 1816, Congress, now with Madison’s endorsement, chartered the Second Bank of the United States.

The Second Bank, though endowed with more capital, was in most respects a replica of the first. It succeeded at restraining the state banks from issuing too many notes, thus keeping a lid on inflation. It worked to mute excesses in the business cycle. And the Bank’s notes were widely accepted as a common currency, no small thing for a nation pushing across an unsettled continent. But the Second Bank met a fate no better than the first.

Although Congress approved its recharter, the margin was not sufficient to override the determined veto of Andrew Jackson. In 1836, the national bank was, for the second time, allowed to expire. Once again, the country experienced inflation, this time followed by a severe depression. In 1841, Congress chartered a third bank. President John Tyler, a southerner preoccupied with states’ rights, vetoed it. And there, for some seven decades, matters rested.

Given the two Banks’ overall effective records (and allowing for some stumbles by each), the question must be asked: Why such a haste to abolish them? Despite their success, many Americans regarded the Banks with profound suspicion. Alexis de Tocqueville, the French political thinker who toured Jacksonian America, noticed in his travels through what was still a frontier society a pair of seemingly inconsistent facts.

The notes of the Second Bank were valued equally “on the edge of the wilderness” as they were in Philadelphia, testifying to the people’s general regard for its credit; nonetheless, the Bank had become the “object of intense hatred.” De Tocqueville’s diagnosis was that “Americans are obviously preoccupied by one great fear,” which he identified as fear of a tyrannical government or, as he put it, of “centralization.” De Tocqueville was plainly bewildered. To him— to most any Frenchman—the Bank of France seemed a natural outgrowth of the national government, no less French than the Court of Versailles. But in America, such a bank did not seem natural. It reawakened Americans’ primal anxieties, the colonials’ fear that their hard-won liberties would be crushed by a far-off king.

Even after independence, the pattern of settlement—the way that the frontier continually pushed westward—ensured that a perpetual class of outsiders would resent and resist the power structure in the East and especially the Northeast. For the opposition to central banking was always a matter of geography as much as anything else. In the vote to establish the first Bank in the House of Representatives, only three congressmen from southern states voted in favor; only one from the North was opposed. It was no accident that Jackson, the slayer of the Second Bank, was a rough-hewn soldier and Indian fighter, the first president not from the Eastern Seaboard.

Many early Americans were not merely suspicious of a federal bank; they were suspicious of any big bank, a prejudice that loomed especially large in rural areas. To merchants and city dwellers, banks were a boon, but farmers and debtors (often the same people) resented being hostage to banks, especially large metropolitan banks. And most of America, for a very long time, was rural: when Jackson was elected president, only one of fifteen Americans lived in cities.

Although Europe also had agrarian traditions, farmers in Europe lived in villages. They were surrounded by neighbors, accustomed to interdependence. In America, farmers were dispersed and isolated. They relied less on labor (which was scarcer) and more on capital— which is to say, they relied on banks. It has been wittily suggested, not without cause, that American farmers hated banks because they needed loans. Jefferson in particular was suspicious of finance, a profession he considered ethically tainted. It is worth noting that Jefferson never visited a town until he was almost eighteen. Jackson similarly frowned on financiers. He squashed the Second Bank largely because, he felt, it was a tool of eastern elites.

Jackson’s heritage was remarkably enduring. Even generations later, the reformers who sought to establish the Fed could not admit to favoring a “central bank”—the very phrase was forbidden. Rhode Island senator Nelson W. Aldrich, the first legislator in the twentieth century to draft a bill for a national bank, felt as though he were battling not just with the populists and anti-bank agitators of his own time but also, as he phrased it, with “the ghost of Andrew Jackson.”

Before Congress could consider legislation, the public had to be persuaded of or at least exposed to the idea of establishing a unifying financial institution. In the first part of our story, bankers and others launch a campaign to win over influential citizens in business, universities, and the press. The reformers were a mixed bag— economists, bankers, idealists bent on modernizing the system, and, as well, Wall Street financiers with the more self-serving ambition of enhancing profits.

New York bankers wanted a central bank in part because they wanted to assume a greater role on the world stage. The America of the late nineteenth century was an industrial powerhouse but a financial also-ran. The U.S. dollar was a second-rate currency; incredibly, the dollar was quoted in fewer currency markets than the relatively puny Italian lira or Austrian shilling. In monetary terms, America remained a stepchild of the Bank of England, whose interest-rate maneuvers could, and often did, plunge Wall Street into recession. Financial independence required a more resilient currency, and one whose supply was regulated not in London or in Paris but in America itself.

But what sort of bank would issue this currency and what rules would it live by? These questions had preoccupied Americans since the Civil War. They fought—unceasingly—over whether the money supply should be pegged to the country’s gold reserve, or to silver, or to some other standard. Bankers of the Gilded Age were worried about inflation, as bankers always are; however, for strapped American farmers, money was in chronic undersupply. Farmers, industrialists, bankers, consumers, workers, all had conflicting interests. What became clear to all—after a disastrous panic in 1907, when the banks literally ran out of money—was that the prevailing system in which each bank stood on its own did not work.

The system’s inadequacy was seen most clearly by a newcomer, Paul Warburg, a German expatriate. He was stunned by the primitive condition of American banking and relentlessly lobbied his fellow financiers to embrace reforms modeled on the central banks of Europe. As Warburg acclimated to his adopted country, he recognized the need to cultivate the political establishment, then thoroughly Republican, and recruited the powerful Senator Aldrich to his cause.

Aldrich, however, was unprepared for the progressive tide that was reshaping American politics. Social activism was on the rise and Americans—not unlike in our own time—resented the widening gap between rich and poor, evident in the palatial mansions of railroad tycoons and industrial barons. The progressive movement was an effort to balance the scales. Since progressives were all for modernization, they should have looked favorably on proposals for a central bank, but progressives were innately wary of bankers—even of reform-minded bankers.

And they deeply mistrusted Senator Aldrich, who had acquired his great wealth in shady, backroom dealings with monopolists. Aldrich was so out of favor that he opted to abscond from public view, along with a band of Wall Street advisers, and rewrite the nation’s banking laws in secret. Aldrich’s clandestine effort, a stranger-than-fiction mission to a remote Georgia island, would forever link the Fed’s founding to the wildest claims of conspiracy theorists and cranks.

In the second part of the story, as Warburg’s proposals are painstakingly translated into legislation, bankers pass the baton to politicians. No sooner did this process start than, in 1912, the electorate installed the Democrats in Congress. The Democrats were hostile to a central bank. After all, they were the party of Andrew Jackson. Moreover, they were concentrated in the West and South and naturally feared that a central bank would enhance the power of the big banks in New York.

But the Democrats could scarcely overlook the pressure for reform that was sweeping the country. Moreover, the Democratic president-elect, Woodrow Wilson, was a good way to evolve from his small-government predecessors. Though hardly a New Deal– style activist, Wilson was more willing to balance concern for individual freedom with a desire to promote national unity and the overall health of society.

On the specific issue of central banking, Wilson—a student of American government—was favorably disposed of. The task of reconciling banking reform with the party’s states’- rights traditions fell, improbably, to a southern congressman—the Virginian Carter Glass. A child of the Civil War, a rebel in his bones, Glass was ambitious enough to see that modernizing banking could be his ticket to a place in the national spotlight. But he had to devise a program that did not run afoul of his party’s prejudices.

Prodded by Wilson, pressured by Warburg and by Main Street bankers, Glass advanced a bill that, in its way, mimicked the constitutional experiment in federalism. The Federal Reserve would be unlike the central banks of Europe—for it would not be one bank but twelve. Power would be shared between the center and the periphery, between the federal government and the private banks that it was designed to serve. If the establishment of the Fed constituted a landmark moment, when the direction of society veered from laissez-faire toward government control, it was nonetheless intended to be a compromise.

Glass’s aim was to reconcile a set of overlapping tensions— between local and federal authority, between private and public interest, between farmers and merchants, as well as between small-town bankers, big-city banks, and Wall Street. His aim was to pool the nation’s banking reserves, in accord with the principle of collective security, without creating a powerful monster that violated American traditions and the prevailing sentiment against large banks. What he and the other founders could not have envisioned was the degree to which these tensions would persist.

Indeed, in the political climate of today, it is doubtful whether the Federal Reserve Act could be passed. A century later, opposition to the federal government, such as in the Tea Party wing of the Republican Party, is as impassioned as ever. In 1913, Glass had to overcome the fear that a central bank would become a tool of Wall Street; in the aftermath of the 2008 crisis, when the Fed and the Treasury provided bailouts or credit to the biggest banks, such fears ran rampant.

And just as opponents of the Fed’s establishment protested that it would lead to inflation, the modern Fed’s sustained policy of near-zero percent interest rates has prompted critics to warn that a dangerous inflation looms ever nearer. More generally, in an America still nursing its wounds from the financial crisis, both its central bank and its prominent private banks have become objects of vitriol and mistrust. Truly, the battle for the Fed in 1913 foretells our differences today.

Transition from Constitutional Republic to Liberal Democracy – Search Videos (bing.com)

The United States has been characterized as a liberal democracy since its inception, although the specific balance between its constitutional republic elements and liberal democratic principles has evolved over time. The term “liberal democracy” generally refers to a representative democracy with protections for individual rights and freedoms, and the U.S. Constitution established such a system with its emphasis on checks and balances, separation of powers, and the protection of individual liberties.

The transition to a more inclusive democracy in the U.S. has been gradual, with significant milestones such as the introduction of universal suffrage and the expansion of civil rights. For instance, the 19th Amendment in 1920 granted women the right to vote, and the Civil Rights Movement of the 1950s and 1960s led to legislation that furthered racial equality and voting rights.

It’s important to note that the terms “constitutional republic” and “liberal democracy” are not mutually exclusive; rather, they describe different aspects of the U.S. political system. The U.S. remains a constitutional republic because it has a constitution that limits the powers of government and guarantees certain rights, and it is also a liberal democracy because it has democratic processes and protects individual liberties.

The Perfect 600 Square Foot Getaway Cabin – Video Tour – YouTube

Reprinted by arrangement with Penguin Press, a member of Penguin Group (USA) LLC,

The Jekyll Island Summit of 1910

The Real Birth of American Democracy

The Need for Reform: The Secret Meeting That Created the Federal Reserve:

Unveiling Jekyll Island’s Mysteries. (youtube.com)

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