What It Was Like Without A Fed

Stephen Girard’s Bank, Philadelphia (Photo by Archive Photos/Getty Images)

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It was only a golden era. American growth and opportunity in times like 1836-61 and 1865-1913—and even, sure enough, 1811-12—was epic. Robert L. Bartley, the supply-side god who ran the Wall Street Journal editorial page in the 1980s, in his 1992 memoir The Seven Fat Years had a Martian type into a handheld to get economic data. Bartley couldn’t get straight answers from typical economists. “How was the recovery in the 1980s,” he’d ask, and get something like, “taking into account slack, growth under Reagan lagged that of Carter and latter Ford and peaked for the long term in 1973,” etc. So in his book, he pretended he had a completely neutral third party, a Martian, and asked it, to get answers straight up.

Let’s do it ourselves. “Martian, what was annual average growth from 1836-61?”

****4.28 percent****

“Martian, what was average annual growth from 1865-1913?”

****3.71 percent****

“Martian, what was annual growth from 1811-1812?”

****3.99 percent****

This is fun!

The United States had nothing resembling a Federal Reserve or a central bank (or a serious war) in these date ranges. The First and Second Banks of the United States, congressionally chartered institutors resembling modern central banks, existed from 1791-1811 and 1816-36. And by the way, growth was plenty passable under their runs—largely, it must be noted, because these banks had expiration dates. They were to run for twenty years and twenty years only. The nation knew that central/government banks even when they existed were not permanent, and it acted accordingly by growing.

When America lacked a central bank, it did simply great. Great, great, great. You can quibble, as you should, with GDP as a measure, but as a proxy, it works. Growth was wonderful when the United States lacked central banking institutions. Four percent per year for decade upon decade. Industries sprouted and bloomed, inventions burgeoned, standards of living for masses always hit new heights. The contention that the pre-Fed era was one of repetitious banking “panics” has no force. A banking system is to be judged by real results. You have a great economy? Then you have a great banking system.

“Martian, what was annual average growth from 2000-24?”

****2.12 percent****

We’ve been growing for a quarter century at a nearly fifty percent discount to the eras in which we had nothing resembling a central bank. What benefits do central banks provide again?

Who knows, so let’s pose another question. How did the incredible eras, economically speaking, do it with their non-central-bank systems? This is a central question, explored in detail, in our new book Free Money: Bitcoin and the American Monetary Tradition.

In these glorious old eras, banks came into being and operated like any other business. They sought to provide a useful service. Theirs was to provide a safe haven for deposits and provide currency and loans to an economy with huge amounts of potential transactions and real businesses opportunities. People needed currency for the transactions and loan credits for the business opportunities. Banks provided both, having taken in deposits. They made a profit on this business, and all was well.

But didn’t banks issue too much currency and do too much lending so that they could get rich quick while their depositors got scammed? (runs the common modern objection). Does the average business in a mega-growth economy try to scam its customers? By definition, no. So neither did these banks. If the economy grew really well, which it did, the banking system was great.

The system of private regulation was great as well (of course). In Free Money, we discuss, in the Federal period, the amazing Bank of Stephen Girard, which from its Philadelphia perch made sure that banks with which it did business maintained proper practices. We discuss, regarding the post-1836 period, the phenomenal Suffolk Bank system of greater New England, by which the main bank kept reserves and accepted currency from member banks under watchful eyes of probity. How did it go? Growth numbers do not lie.

The United States barely issued any dollars at all in this period. Congress offered a definition of a dollar, an ounce of silver or a twentieth of gold, and was pleased to watch any and all parties make dollars as they saw fit on the basis of that definition. Paper dollars, issued by private banks, were redeemable on demand at the home institution in the precious metal. Private bank-issued dollars were useful (more than coin in important cases) as transactions instruments, just as bank credit was for business customers.

The whole thing operated like a big wonderful flourishing organic body. To behold the growth of the country after 1865 especially is breathtaking. Robert Gordon’s book The Rise and Fall of American Growth (2016), cranky as it is about the latter twentieth century, and uncritical as it is about the New Deal, cannot help itself when describing the 1870s and 1880s. Rows and rows of spacious houses with yards, everything new, tidy as can be imagined, with elegant transportation to and from the workplace right there—all for working people. He talks about the “tenements” in the big cities—and shows that they blew away the previous housing stock in terms of their spaciousness and conveniences.

Even today in New York City, a premium is placed on that real estate that is prewar construction—pre-World War I. That stuff was really good, and remains so. It is a legacy of the quality of the non-central-bank era.

The Fed controls inflation, so you have to have it, an unregulated banking system is cowboy capitalism, the public has to have a lever lest bankers and greed control everything, the Fed sets interest rates, the Fed controls the money supply, modern economies need such institutions—what are the justifications of central banks again? When we lacked them, the economy was stellar. If we want a stellar economy again, as we should, we should re-establish the predicate. This is private, self-regulating banking, one that sprouts up its own considered supervisory institutions, like we had once upon a time with the likes of Stephen Girard and Suffolk.