From the March 2011 issue of Research Magazine • Subscribe!

March 1, 2011

Furious at Finance

Populist critiques of financial institutions draw on a long tradition.

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Ron Paul, Republican congressman from Texas and former presidential candidate, is famous for railing against the Federal Reserve. He has pushed legislation to audit the central bank and persistently calls for the Fed’s outright abolition, notably in his bestselling book End the Fed. Since January, he has continued this anti-Fed campaign as chairman of the congressional subcommittee that oversees monetary policy.

Listening to Paul, it quickly becomes clear the central bank is not his only target. His statement upon taking the subcommittee chairmanship repeatedly referred to the Fed’s “cronies” on Wall Street and denounced “an unchecked, all-powerful, behemoth banking cartel.” Expressing skepticism that the Fed has any real political independence in making monetary policy, he added that “even if it was politically independent, it is not independent of the influences of Wall Street.”

Bernie Sanders, independent senator from Vermont, who caucuses with the Democrats and describes himself as a democratic socialist, deploys similar rhetorical barrages against a well-known thoroughfare in lower Manhattan. In a filibuster last December, Sanders condemned “the greed and recklessness and illegal behavior on Wall Street,” adding: “These guys, through their greed, created the most severe economic recession since the Great Depression.”

Paul and Sanders are poles apart ideologically, but find considerable common ground in their broadly negative attitudes toward the financial services industry and in pressing for legislation to audit the Fed. Moreover, when it comes to bashing Wall Street, these odd-bedfellow politicians are riding a strong wave of anti-financial populism that cuts across partisan and ideological lines, encompassing left-wingers suspicious of capitalism as well as Tea Partiers hostile to government bailouts.
The financial crisis and its aftermath did much to increase public antipathy to financial institutions. As with the aftermaths of previous crises, such anger helped bring about a more restrictive regulatory regime, in this case mainly through the sweeping Dodd-Frank legislation (which also brought complaints that it provides an insufficient means of reining in the financial sector).

But while anti-financial sentiment has a cyclical element, it also is very much a long-term phenomenon. Negative sentiment toward bankers and brokers has been a notable feature of American public opinion and political life throughout the nation’s history, and it continues to offer a rich source of discontent for politicians and activists to draw upon. Financial services provider, beware.

Early Suspicions

The founders of the United States were sharply divided in their attitudes toward finance. Thomas Jefferson and Alexander Hamilton famously disagreed over the latter’s initiative to create a central bank. Moreover, the agrarian-minded Jefferson distrusted banks in general and disliked the “new created paper fortunes” arising in the cities as Hamilton’s reforms promoted trading of Treasuries and equities.

Such differences helped give rise to political parties, with Hamilton’s Federalists (often seen as precursors to later Republicans) being much more pro-finance than Jefferson’s Democratic-Republicans (later shortened to Democrats). However, even on the Federalist side, there were skeptics of finance, such as John Adams, who disparaged those who “moved money around” rather than doing real work.

By the 1830s, anti-financial agitation had coalesced into a campaign against the Second Bank of the United States, the central bank of the time. Andrew Jackson, elected president in 1828, had a frontiersman’s dislike of the “money power” of Eastern financial interests. He fought and won a political battle against the Second Bank, denying it a renewal of its charter.

Jackson distrusted paper money as a tool of elite bankers, and tried to promote the use of gold and silver instead. His crushing of the Second Bank, however, opened the floodgates for other banks to issue a lot of paper, and Jackson’s executive order requiring the government to accept only precious metal for land transactions clamped down hard on speculation. The whipsawed economy plunged into recession in 1837, when Jackson’s successor Martin Van Buren had just taken office.

Cross of Gold

In the late 19th century, William Jennings Bryan of Nebraska became the leading political figure rallying the public against financial interests. However, gold, which Jackson had seen as a bulwark against bankers’ paper manipulations, now was the bugaboo of the populists. The gold standard, Bryan saw, by preventing inflation served the interests of lenders at the expense of borrowers, including many farmers. To protect the common people, Bryan wanted looser money, by coining plenty of silver.

Accepting the 1896 Democratic presidential nomination, Bryan described the monetary issue as “a struggle between the holders of idle capital and the struggling masses who produce the wealth and pay the taxes of the country.” He closed that speech with the famous words: “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”

Today, interestingly, while some populists press for easy money and credit, Ron Paul calls for a return to the gold standard, seeing it as a constraint not just on government but on unsound financial industry practices (a category in which Paul places fractional reserve banking). In this regard, Paul brings anti-financial populism full-circle, to a view reminiscent of paper-fearing Jefferson and Jackson.

Crises and Hearings

In 1912, Rep. Charles Lindbergh Sr., father of the future aviator, called for a congressional inquiry into the workings of a Wall Street “money trust” he believed held alarming power. Such concerns were on the rise in the aftermath of the Panic of 1907, in which a consortium of bankers led by J.P. Morgan Sr. had coordinated responses to a surge of bank runs, resolving the crisis but with little accountability.

The investigation, called the Pujo hearings after subcommittee chairman Arsène Pujo, helped pave the way for passage of the Federal Reserve Act in 1913. Regional banks were included in the new central bank’s structure to placate populists hostile to concentrating power in New York or Washington. Still, critics including Lindbergh saw the Fed as a new manifestation of the money trust.

The Pujo hearings also likely contributed to a climate of opinion enabling the ratification in 1913 of the 16th Amendment to the Constitution, which granted Congress the power to levy an income tax.

The Crash of 1929 and onset of the Great Depression led to another congressional inquiry into Wall Street’s dealings. Begun in 1932, this came to be known as the Pecora hearings, after committee lawyer Ferdinand Pecora, whose grilling of financiers gained wide public interest. The probe fostered strong political support for the New Deal’s sweeping expansion of federal oversight of finance.

The Pecora hearings’ revelation that some top financial executives had not paid any income taxes during the past couple of years stoked public outrage. This was not entirely fair, as their tax bills reflected huge capital losses after the Crash. Still, Wall Street titans who had been revered during the Roaring Twenties got little sympathy amid the financial and economic disaster.

Some populists of the time thought the New Deal’s regulatory reforms did not go nearly far enough. Father Charles Coughlin, a Catholic priest with a popular radio show, called for nationalizing the banks. Sen. Huey Long of Louisiana headed a share-the-wealth movement and looked forward to the day “when financial masters and market manipulators step aside.”

A Telling Word

Each year, the New Oxford American Dictionary announces a “Word of the Year” to highlight culturally significant changes in the English language. One of the finalists for 2010 was “bankster,” a word that originated in the 1930s and blends “banker” and “gangster.” The term has gained some cultural cachet lately, it seems. Incidentally, the winning word for 2010 was Sarah Palin’s “refudiate,” combining “refute” and “repudiate,” and another finalist happened to be “double-dip,” as in type of recession.

There is always a need for thoughtful criticism and scrutiny of the financial services industry. There is also a need to be on guard against broad-brush vilification. Financial professionals should be aware that anti-financial populism is a tradition that, for better and often worse, is very much alive.

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Financial Wizardry?

Was The Wizard of Oz, L. Frank Baum’s 1900 novel, intended as an allegory about monetary policy? In recent decades, some scholars have interpreted it that way. In this view, the yellow brick road represents the gold standard, and Dorothy’s silver shoes symbolize the populist desire to expand the money supply through silver coinage.

Further parallels may include: Dorothy as the common people; the Scarecrow as farmers; the Tin Man as industrial workers; the Cowardly Lion as William Jennings Bryan (seen as ineffective in his advocacy of silver); the Wizard as American presidents of the late 19th century; the Wicked Witch of the East as banking interests (and that of the West as Western businesses or a hostile environment). Oz itself may be an abbreviation of ounce, and the Emerald City reflects the color of dollar bills.

Some scholars doubt this interpretation. One point made by skeptics is that Baum reportedly got the name Oz from the O-Z of a filing cabinet. In any event, any monetary allegory intended in the novel got muddied in the 1939 color film, in which Dorothy’s shoes were red, not silver.

Illustration by John Ueland

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