Mises Daily Articles
The 19th-Century Bernanke
[An MP3 audio file of this article, read by Floy Lilley, is available for download.]
There is something disarming about a technocrat. While it is easy to dismiss elected officials as blustering panderers, there is something comforting in the image of the specialist civil servant toiling away with industry and equanimity. We tend to imagine such an employee of the state poring over statistics as an ancient Greek priest might examine entrails, and carefully allocating resources like an Egyptian vizier allocating slaves. The technocrat seems benign, crucially important, and above the fray.
This is certainly the image that has been cultivated by Federal Reserve chairmen. One remembers Alan Greenspan, with his prominent braincase and thick glasses, uttering technical jargon just arcane enough to assure the markets that all was well with the "Greenspan put." And we are regularly presented with Ben Bernanke, the bearded sage, comfortingly citing statistics that show how government remedies are working their way through the economy (however egregiously wrong he may be).
This aura surrounding technocracy has grown especially since the civil service "reform" of the late 19th century. But technocrats have been striving for it for much longer.
This striving can be seen distinctly in the person of Nicholas Biddle (1786–1844), one of the more interesting characters in United States history.
Starting in 1822, Biddle was the president of the American central bank that preceded the Fed: the Second Bank of the United States. Biddle was initially reluctant to take the job. A scion of a high society Philadelphia family, Biddle had no stomach for the indecorum of politics. He ultimately accepted the position, however, stating that the Bank was, "of vital importance to the finances of the government and an object of great interest to the community."
His disdain for competitive democracy (in his words, "the violence of party") and his esteem for the Bank merged into a fervent belief that the Bank should always be above politics. He implemented that belief as policy while he was Bank president. He proudly declared,
There is no one principle better understood by every officer in the Bank than that he must abstain from politics.… We believe that the prosperity of the Bank and its usefulness to the country depend on its being entirely free from the control of the officers of the Government, a control fatal to every bank which it ever influenced. In order to preserve that independence it must never connect itself with any administration — and never become a partizan of any set of politicians.
In the 20th and 21st centuries, Federal Reserve chairmen carried on this tradition of jealously guarding the Fed's independence. Witness Ben Bernanke's recent warnings that the Federal Reserve Transparency Act would politicize the Fed.
As we shall see, in practice, Biddle, like Bernanke, was not against politics per se; so long as it was conducted in an unpublicized, "gentlemanly" manner.
The political climate during the early years of Biddle's tenure seemed to suit his temperament and attitude toward governmental institutions perfectly. In an interview with the Frenchman Alexis de Tocqueville, who was in Philadelphia conducting research for his book Democracy in America, Biddle explained how American politics had been tamed and a placid consensus had emerged in recent years.
For a long time we were divided between Federalists and Republicans.… They fought bitterly until the Federalist party, always short in numbers, was completely crushed by its adversary.…
Since then there have been people who support the administration and people who attack it; people who extol a measure and people who abuse it. But there are no parties properly so called, opposed one to the other and adopting a contrary political faith. The fact is that there are not two practicable ways of governing this people now, and political emotions have scope only over the details of this administration and not over its principles.
In other words, under the new consensus there was no need for debate. It was simply a matter of civil servants like Biddle dutifully implementing wise policy.
Tocqueville didn't completely buy Biddle's story. As H.W. Brands wrote, "perhaps because his own experience of aristocracy was deeper than Biddle's, Tocqueville detected a continuing struggle between the few and the many in America." Tocqueville believed that "aristocratic [and] democratic passions" were always present, and "though they may slip out of sight there, they are, as it were, the nerve and soul of the matter."
Tocqueville was right, and the democratic passions he spoke of found their embodiment in the person of Andrew Jackson, who became president of the United States in the 7th year of Biddle's tenure. In many ways, Jackson was Biddle's opposite. While Biddle was the quintessential apolitical civil servant, Jackson was a volatile populist who considered himself the champion of democracy.
Jackson hated the prevalent political atmosphere as much as Biddle loved it. Where Biddle saw consensus and benign paternalism, Jackson saw an entrenched establishment ridden with corruption. He had first-hand experience with the cozy, back-scratching ways of the Republican political monopoly throughout his public career, and especially during his first, failed attempt at the presidency, in 1824.
Of the three chief candidates of that election, Jackson was clearly the most popular. But there was an electoral deadlock, so the race had to be decided by the House of Representatives. Through a backroom quid pro quo with rival candidate Henry Clay, John Quincy Adams ended up winning the House vote and, as a result, the presidency.
After finally defeating Adams in 1828, Jackson came into office with a large chip on his shoulder against the Republican establishment. He also had a distinct disliking for Biddle's Bank in particular, for he was an ardent hard-money advocate. His monetary opinions were informed by contemporary hard-money theorists and his own readings concerning the South Sea Bubble of 1720. He rightly blamed the Bank for the Panic of 1819 and had been a leader in the fight against inconvertible paper money in Tennessee.
Jackson displayed his disregard for the Bank moderately in his first annual message:
Both the constitutionality and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens, and it must be admitted by all that it has failed in the great end of establishing an uniform and sound currency.
Biddle responded to Jackson's remarks with patronizing nonchalance.
They should be treated as the honest though erroneous notions of one who intends well.
In a later meeting, Jackson warned Biddle that he thought the Bank was unconstitutional. Yet Biddle continued to not take the president seriously. He characterized Jackson's position as a harmless idiosyncrasy.
As such it is far less dangerous because if the people know that this is not an opinion which they must necessarily adopt as a portion of their party creed — but an opinion of the President alone, a very honest opinion though a very erroneous one — then the question will be decided on its own merits.
Biddle's attitude continued even after Jackson's 'erroneous opinion' of the Bank showed itself to be persistent.
In respect of General Jackson and Mr. Van Buren [Jackson's vice-president], I have not the slightest fear of either of them, or both of them.… I think we can defend the institution from much stronger enemies than they are.
Biddle's patronizing dismissal of Jackson was a gross underestimation. Andrew Jackson was as tough as they came. As an adolescent, he fought in the War for Independence and gained a scar on his face from a sabre blow he received for refusing to clean a British officer's boots. His body was riddled with the scars of a lifetime of duels, brawls, and battles.
He also had the people on his side. He was considered the hero of the Battle of New Orleans, who rescued the honor of the new nation toward the end of the War of 1812. And he was swept into office in a wave of popular anger at the corrupt political establishment. All in all, he was not a man to be taken lightly.
The Bank's charter was not up for renewal until after Jackson's first term. Biddle initially liked it that way, because, in keeping with his desire to shelter the bank from politics, he did not want its renewal to be an election issue. He figured that even if Jackson were reelected, as a second-term president he would likely be less popular and thus less of a threat.
The scheming Henry Clay, then a congressman, who cared more about becoming president himself than preserving the Bank, wanted Biddle to apply for an early renewal of the charter. Jackson was so popular that Clay needed a potentially explosive issue like the Bank's rechartering to stir the pot, or else the president would glide into an easy reelection.
Of course this would put the Bank more at risk, but Clay convinced his benefactor Biddle (Biddle had used his Bank position to help Clay with his chronic debt problems) that an early renewal would be a sure thing. He wrote to Biddle from Washington,
Have you come to any decision about an application to Congress at this session for the renewal of your charter? The friends of the Bank here, with whom I have conversed, seem to expect the application to be made.… My own belief is that if now called upon, [President Jackson] would not negative the bill; but that if he should be re-elected the event might and probably would be different.
Thus did Clay manipulate Biddle into fatefully applying for an early renewal. Biddle wrote to Congress in 1832, "We have determined on applying to the present Congress for a renewal of the charter." And he couldn't help but slip in a remark insisting that this decision had nothing to do with tawdry politics: "Neither I nor any of my associates have anything whatever to do with the President or his election. I know nothing about it and care nothing about it."
Despite such repeated proclamations, Biddle didn't mind writing propaganda articles promoting the Bank and bribing newspaper editors to run them. Biddle wrote to one such editor,
If you will cause the articles I have indicated and others which I may prepare to be inserted in the newspaper in question, I will at once pay to you one thousand dollars.
Now, this was public money that he was offering as a bribe, and an amount worth over $22,000 in today's money. Of course, he insisted, there was "nothing in this communication which [he] should care to conceal." Nonetheless, he requested that the editor return the letter, "as it might be misconstrued."
This was exactly the sort of discrete, gentlemanly corruption that Jackson abhorred.
The Bank's most vocal supporter in Congress was Daniel Webster. Even though Webster had staunchly opposed the bank's original charter, he discovered the merits of the Bank when he found himself on its payroll. At the peak of the renewal controversy, in which Webster was playing a leading role, he wrote to Biddle,
I believe my retainer has not been renewed or refreshed as usual. If it be wished that my relation to the Bank should be continued, it may be well to send me the usual retainers.
The renewal bill passed both houses of Congress but was vetoed by Jackson. Clay's machinations backfired. The Bank veto proved to be a fillip for Jackson's popularity, and he went on to win a landslide reelection.
Biddle knew that a major follow up to Jackson's victory could conceivably be to remove the Treasury's deposits from the Bank. This would be a crippling blow because, unlike the Fed, the Bank's money-creation power was limited by the gold standard. But even after his first defeat, Biddle's swaggering confidence continued.
"They will not dare to remove them," Biddle told Webster, "If the deposits are withdrawn, it will be a declaration of war which cannot be recalled."
But Jackson knew that Biddle had already been conducting a surreptitious war. His attorney general, Roger Taney, presented to Jackson evidence that Biddle and the bank had deliberately manipulated the money supply just before the renewal bill was to be deliberated over. Taney asked rhetorically,
Can any impartial and unprejudiced mind doubt the motive? Was it not to compel the people to continue its monopoly and privileges, not on account of the benefits conferred by it, but to escape from the suffering which the [Bank] had the power to inflict?
Taney also provided evidence of Biddle's corruption of the press.
Provoked by Biddle's appalling machinations, Jackson prepared to remove the federal deposits from the Bank. Treasury Secretary William Duane balked at the idea, warning Jackson that Biddle might retaliate by creating a financial panic. The idea that the bank could have the power to do such a thing only strengthened Jackson's resolve to end it. He announced his final decision to withdraw the funds to his cabinet. In his address, he remarked,
The Bank has by degrees obtained almost entire dominion over the circulating medium, and with it, power to increase or diminish the price of property and to levy taxes on the people in the shape of premiums and interest to an amount only limited by the quantity of paper currency it is enabled to issue.
In this speech, Jackson demonstrated a recognition of how central bank money manipulation can impose an inflation tax and create housing bubbles. If only there was such an awareness among today's elected officials.
According to mainstream historian H.W. Brands,
The decision, when it came, didn't surprise Biddle. His spies had informed him of the debates within the administration.… He considered a preemptive strike by buying off vulnerable members of the administration and Congress.
Biddle planned to do so by offering them Bank positions.
"In half an hour," he boasted to an intimate, "I can remove all the constitutional scruples in the District of Columbia. Half a dozen presidencies" — of bank branches — "a dozen cashierships, fifty clerkships, a hundred directorships, to worthy friends who have no character and no money." But he held back, not quite believing that Jackson would really go through with removal.
With such a writhing multitude of sinecures at Biddle's disposal, it is no wonder Jackson called the Bank a "hydra of corruption."
Brands goes on to describe Biddle's counterattack.
He called in loans, tightened credit, and otherwise reduced the bank's financial exposure.… To compliment his fiscal tightening, Biddle went ahead with his bribery, offering lucrative positions to Jackson loyalists if they would abandon the president and join the bank.…
The attack on the money supply had an immediate effect, starting in the nation's financial capital.… The financial panic spread from New York across the country. Banks collapsed in Washington and Philadelphia while a Boston paper described conditions there as "absolutely frightful." But Biddle maintained his choke hold on the money supply.
Biddle's Machiavellian arrogance reached a crest in his response to the crisis he generated. He wrote,
My own view of the matter is simply this…. The [instigators] of this last assault on the Bank regret and are alarmed by it. But the ties of party allegiance can only be broken by the actual conviction of existing distress in the community. Nothing but the evidence of suffering abroad [that is, in the country as a whole] will produce any effect in Congress.… This worthy President thinks that because he has scalped Indians and imprisoned judges, he is to have his way with the Bank. He is mistaken.
As is well known to readers familiar with Austrian Business Cycle Theory, Biddle's contraction of money substitutes that were pyramided on top of the specie supply was actually a good thing: it only brought on the necessary correction that, if postponed further, would have eventually been even worse. But obviously his motivations for the action were deplorable, as well as highly telling about the attitude of central bankers.
Jackson was beset by petitioners suffering from the panic and legislators challenging the constitutionality of his action.
He told his vice-president, "The Bank, Mr. Van Buren, is trying to kill me. But I will kill it."
Jackson was vindicated in standing his ground. Within months, the correction was over, economic growth resumed, and Biddle's power was broken.
In 1836, the Bank's charter expired. It limped on for five more years as a nonfederal bank before finally going bankrupt. Four years after that, Biddle died at age 58.
Like Ben Bernanke today, Nicholas Biddle cultivated the veneer of a benign civil servant calculating serenely far above the political fray. In reality he, like Bernanke, was up to his neck in the backroom game of power.
When Biddle's bureaucratic cradle was rocked, he quickly morphed into a Machiavellian monster. Keep that in mind as Ben Bernanke gets progressively cornered by Ron Paul and the bourgeoning anti-Fed movement. (Already the Fed is less popular than the IRS. And the "Book Bomb" for Ron Paul's forthcoming book End the Fed could bring the situation to a tipping point.)
When you hear about the Federal Reserve Transparency Act getting stalled in committee, think of Daniel Webster, bought and paid for with central bank money. When you read Fed apologia in the New York Times, The Economist, and the Wall Street Journal denouncing the "reckless populism" of the Act, think of the newspaper editors in Biddle's pocket.
Most of all, when you see Ben Bernanke on television, "respectfully" insisting upon the Fed's independence and "gently" warning of the economic consequences of any restrictions upon it, think of Nicholas Biddle — an outwardly mild-mannered fellow who would wreck a whole nation's prosperity in order to cling to power.
Libertarian historian Lord Acton said, "Power tends to corrupt, and absolute power corrupts absolutely." And the corrupt banking magnate Mayer Amschel Rothschild said, "Give me control of a nation's money and I care not who makes the laws." Those two dictums, taken as dual premises, lead inexorably to the conclusion that men like Biddle and Bernanke should be challenged with eternal vigilance by all people who would be free.