Thursday, October 23, 2008

A new beginning

By Carl

Barack Obama has taken a couple of days from campaigning to attend to family matters. We here at The Reaction offer our prayers and hopes for Granny Obama's swift recovery.

As I stood in the shower with little to do except rinse, I pondered American history, and it occured to me that we have reached yet another crossroads for our nation.

It seems to happen every three generations or so, roughly every hundred years, and I'm not sure that it's a coincidence that it happens near the turn of a century.

Events in this decade will echo until the next century, in other words. The pattern is pretty immistakable: an attack on the American economy, followed by a blunderous decision to go to war, followed by a mad scramble to rectify the troubles we've created, followed by a mid-century conflagration the likes of which we hope never to see again.

A brief look back: In 1807, the American frigate Chesapeake was boarded with nary a fight by sailors from the British warship Leopard, on the pretext of searching for deserters. Four were found, only one of which was actually British: three Americans, two black and one white, were also seized.

Ironically, the event itself turned out fairly well for the Americans: only the British sailor was actually tried and hung, while the Americans were eventually returned to America, and Britain offered to pay reparations for damages to Chesapeake

However, this incident did force the passage of the Embargo Actof 1807, which led directly to the War of 1812. The Embargo Act was a pretty dumb idea (conceived by arguably one of the smartest men in history, Thomas Jefferson). America had tried to remain neutral in the French-English conflicts then brewing, and had this act not been passed, likely could have avoided the War of 1812 altogether.

That war saw Americans attacked directly in their own homeland, something that would not happen again until September 11, 2001.

The war begat the era of expansionism, the Monroe Doctrine (buhbye Native Americans), manifest destiny, and an overall sense of hubris and domination on the part of all American citizens, which culminated of course in the Civil War, one of the most humbling experiences any nation can confront.

Skip ahead a few decades to the 1900s, and the Great Panic of 1907. This is an interesting crossroads in history, because some much of what we know today of the Federal Government -- The Federal Reserve, the Interstate Commerce Commission, the Federal income tax -- finds its roots in this crisis.

In a nutshell, the United States nearly went bankrupt because of the greed of two men: Otto Heinze and Charles Morse, who cornered the market first in ice, and then attempted to corner the market in copper by forcing his brother Augustus to abandon his company.

The mechanics of the scheme are complex (altho it does involve short selling, which is an underpinning of the current crisis), and suffice it to say, Otto failed. Miserably. Instead of driving the price of Auggie's company up, it dropped precipitously.

Otto Heinze's brokerage collapsed under the weight of its debts, money borrowed to finance this sceheme using shares of the copper company as collateral.

Worse, many banks that owned stock in the copper company as collateral also collapsed, the flip side of these transactions, as the price dropped.

Banks affiliated with those banks, so-called correspondent banks, like Mercantile Bank of New York, began to suffer under the weight of the outstanding loans they had made to the banks that held these worthless shares as collateral.

Sounding familiar? Like banks that owned the derivatives of worthless mortgages that weighed on the books of the banks that lent the money to shareholders today?

There was a run on Mercantile, which led to a run on all the money center banks, and banks were running out of money. Banks were reluctant to lend to other banks so that those banks could lend to customers, and as a result, the stock markets collapsed.

Boy, this really DOES sound familiar!

And so on. In 1912, as a result of this crisis, President Woodrow Wilson established the Federal Reserve, thus ceding the printing and issuance of American currency to a quasi-private enterprise composed of many of the large money center bankers (the precise list of board members is unknown).

Wilson's trade policies were at the center of America's entry into World War I. He was a free trader, lowering tariffs wherever possible and trying to remain strictly neutral in the European conflict, using the central bank to keep money flowing freely.

Both Germany, by attacking American shipping including the Lusitania, and England, by embargoing Germany, tested American neutrality. Wilson managed to avoid going to war on either side, of course, until his second term when Germany tried to recruit Mexico as an ally.

And World War I begat American global influence with the Fourteen Points, the League Of Nations and our participation in the Treaty of Versailles, which begat World War II and so on...

And then there was September 11. Which begat the Bush attacks on American governance and oversight, filling the Federal government with the hubris that the markets could police themselves while we attempted to engage in a dual homeland security/ego-driven war policy overseas.

Which begat our current financial pickle.

History comforts us with the knowledge that somehow, things work out for the short term better, and that it doesn't particularly matter whether the President in office is particularly intelligent, like Jefferson, or particularly principled, like Wilson. Somehow, things work out.

That's not the most comforting thought imaginable, but what's past is prologue and it is a new hope for us all.

(Cross-posted to
Simply Left Behind.)

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