Wall Street and the Rest of Us:
The Populists Stand Up
by Stoney Bird
Stoney Bird is a retired corporate lawyer, who spent part of his time in that role soliciting salaried employees for contributions to the company’s PAC.
This is the tenth in a continuing series of articles that began with the January, 2014 issue. The series is an attempt to address some of the impediments to democracy in American society. Earlier articles covered the Lewis Powell memorandum, the Constitution, the electoral system, the money system, and the job system — all of which have contributed to our system of unrepresentative and plutocratic government.
“All communities divide themselves into the few and the many. The first are the rich and well-born; the other the mass of the people … Turbulent and changing, they seldom judge or determine right. Give therefore to the first class a distinct, permanent share in the Government.”
— Alexander Hamilton,
in the Constitutional Convention, 17871
“To erect and concentrate, and perpetuate a large monied interest, is a measure which … must in the course of human events produce one or other of two evils, the prostration of agriculture at the feet of commerce, or a change in the present form of federal government, fatal to the existence of American liberty.”
— Virginia Resolutions of 1790 (drafted by Patrick Henry)2
Between the monied interests of this country and the rest of us there has ever been a divide, as the quotations above show. Indeed, the contention arose long before the founding of the United States. One could say that it was the corrupt union of money and a distant government that caused the formation of the United States. As the East India Company could sway its minions in Parliament before 1776, so today Wall Street dictates what happens in Congress to the detriment of the rest of us, and indeed of the whole world.
The battle has been carried on in various arenas. Most recently, the Occupy movement exposed the rawness of the divide in our own time. It has been equally raw in the past. In this article, we’ll read about the Populist movement of the late nineteenth century, when farmers from all over the Midwest gathered, discussed their bondage to the Wall Street banks and eventually produced a coherent and persuasive program of reform.3/4 In the course of time, much of it was adopted.
A key part of their reform program, which was not adopted, was a plan to end banking control of the money system — to have a money system not based on interest-bearing debt issued by banks at all.5
The Banking System that the Farmers Faced
To set the scene, I’ll first describe the general economic situation of the last half of the nineteenth century.6 Prices had risen sharply during the Civil War — 74 percent in four years. To finance the war, Lincoln had canceled the gold backing of bank notes, issued $2.6 billion in federal securities and issued $500 million in “greenbacks” — currency backed only by the government’s credit. The resulting great surge in the money supply led directly to great inflation, to the dismay of the bankers and bondholders. Inflation meant they would be paid back with dollars that were worth less than the ones that they had lent.
After the war, to the satisfaction of Eastern bankers, the gold standard was re-imposed, and the greenbacks were gradually retired. The price of gold was pegged at the pre-war price of $20 per ounce, forcing prices to pre-war levels. This meant that the bankers would be paid back with “full value” dollars, but farmers and other debtors were headed for hard times.
In fact, farm prices fell steadily until the end of the century — a period known as the Great Deflation. Wheat, for example, fell from $2.06 per bushel to 35¢ a bushel. Farmers were devastated.
Part of the problem was the lien system by which farmers financed their operations. They borrowed to purchase seed and supplies in the spring, and as security for the loans, banks insisted on a lien not just on the crop or the equipment that the farmer might be buying but on the farm itself. Interest rates on these loans ran as high as 36 percent. Over the course of years, many farmers could not keep up, and eventually the bank foreclosed.
So there was a bubble of demand for cash and credit at planting time as well as at harvest time when demand for cash by farmers and credit by both farmers and local businesses surged. Local banks often ran out of reserves and turned to the regional banks, which would in turn call on the big money center banks. There being no central bank and no federal regulation of banking decisions, the big banks would make the decision to lend or not to lend solely on whether it suited their own interests at that moment, assuming they had the wherewithal in the first place. The dirt farmers of South Carolina and Kansas understood perfectly what arbitrary power Wall Street had over their survival.
The root cause of the high interest rates was tight money, a condition exacerbated by the return to the gold standard.7 The gold standard also kept the money supply from increasing quickly when demand for credit was great or unexpected. It took 15 days to ship gold from Europe.
Advocates typically claimed the gold standard produced financial stability. This was not true. There was often volatility, as historian Fernand Braudel has shown. It didn’t matter whether the government controlled the money system or left it to the banks, or whether there were central banks or not. Nor did it matter which metal (gold, silver, copper) was the “standard.” The discovery of new gold or silver mines disrupted the money supply, causing one to increase in relative supply with the other becoming a more stable standard of “value.”8
Farmers Decide to Stand Up
The Populist Movement started in Lampasas County, Texas, in 1877, where desperate farmers gathered to form the Knights of Reliance. Their aim was self-education so as to avert the day “when all the balance of labor’s products become concentrated into the hands of a few, there to constitute a power that would enslave posterity.”9 A few years later they renamed themselves the Farmers Alliance, and there were 120 branches meeting all across Texas.
As many as 20,000 people gathered for Alliance meetings, many coming many miles by covered wagon and staying in encampments for several days in order to learn about the money system and formulate ideas of redress.
Much more so than most of the public these days, the plain people of the Farmers Alliance understood the whole system, and they knew the changes that they wanted. For example, the “Cleburne Demands,” adopted in Cleburne, Texas in 1886, called for federal regulation of the banking system; a national currency (the “greenbacks”) not based on gold; expanded money supply, both in gold and silver coins and in greenbacks; Congressional regulation of the money supply; and co-operative “sub-treasuries” for purchasing and storing farm produce in every county.
Cutting Out the Banks: The Sub-Treasury Plan
A key institutional element of the proposed money system reform was creation of farmer co-operatives. The co-ops would purchase the farmers’ crops, store them in co-op warehouses and grain elevators, and hold them until the best prices could be obtained. This system meant that individual farmers would not be at the mercy of the market as it stood when the harvest was brought in. The co-ops would also act as purchasers of farm equipment and supplies, passing on the resulting lower prices to the farmers.
The largest of these was the statewide Texas Co-operative, formed in 1887 under its business manager, Charles Macune. By 1888, it had raised $20,000 through the sale of Co-operative stock to its members and had obtained liens on $200,000 worth of collateral, both land and livestock. The banks refused to lend to the Texas Co-op, and it could not pay for the supplies it had ordered from wholesalers. An appeal brought in $80,000 in additional financing from farmers, and the Co-op survived that year, but the next year it had to close its doors. Macune concluded that “all those who controlled the moneyed institutions of the state either did not choose to do business with us, or they feared the ill will of a certain class of businessmen who considered their interest antagonistic to those of our order.”
Seeing that the banks would not do their part, Macune proposed a system that would not need the banks at all. At the Alliance meeting in St. Louis in 1889, he called for a system of government credit. The new plan was that the “sub-treasuries” were to be warehouses and grain elevators established by the U.S. Treasury. A farmer would place his crop in storage in the local sub-treasury and be able to borrow against it from the government at 1 percent or 2 percent‚ or sell his crop — or borrow against his land. The farmer would be paid in greenbacks or in negotiable certificates of deposit, thus increasing the money supply at harvest time, when a seasonal increase was needed. These would be retired when the farmers paid off their loans.
The overall effect would have been to take out the banks as intermediaries, to have a flexible supply of money and for farmers to have financing at “true cost.” The banking hierarchy would be dismantled and subservience of Western and Southern farmers to Eastern bankers undone.
The Populist Beacon
By 1887, the movement had spread to the Dakotas and the Carolinas on a platform that was a beacon for public policy for the next 50 years:
- a progressive income tax;
- federal regulation of railroads, communications and other corporations;
- legal rights for labor unions;
- government price stabilization for farmers;
- government credit programs for farmers;
- above all, public control of the money system, and the overthrow of the lien system.
This program was not adopted right away. In 1892, unable to persuade either Democrats or Republicans to support their program, the Farmers Alliance created the People’s Party and put up their own presidential candidate. In 1896, William Jennings Bryan was the presidential candidate of both the Democratic Party and the People’s Party. Bryan was famous for his oratorical skills and the vivid imagery of his “Cross of Gold” speech, but according to Greider, Bryan’s “free silver” platform was “shallow, even reactionary, compared with the far more radical plan that Populist thinkers had devised.”10 Bryan lost the election to William McKinley, and the People’s Party weakened.
The party faded away, but not their ideas. By the time of the New Deal most of the Populist program had been enacted, some of it as early as the Progressive Era of the early 1900s, specifically the progressive income tax and federal regulation of railroads. New Deal farm programs provided for government purchase and storage of crops and subsidized credit for farmers. We won’t go into detail here, but in more recent decades, neo-liberal tendencies have led to the repeal or diminishment of these Populist-inspired advances. Just to name a few of these retreats we can note that the income tax has become far less progressive, workers’ organizing rights are far more restricted, and there is less protection of farmers unless they are agri-businesses.
Even at the high point of reform during the New Deal, banks remained in the middle; for example, in the system of subsidized credit for farmers. More to the point, in 1913 the banks had arranged the establishment of the Federal Reserve, which entrenched them in their command of the money system as a whole. The Federal Reserve deserves a chapter of its own, however, and we’ll study its power over our lives and its unaccountability in a future essay.
Just as in earlier eras, a key question for our time is what purpose money policy is supposed to accomplish. Is it to preserve wealth earned in the past and held in few hands, or is it to stimulate new wealth and spread it? In our time we must also ask whether it is to produce economic “growth” with the accompanying ecological devastation, or is it to promote living in harmony with nature?
These are not only political questions but constitutional questions, and they are questions that require our learning to converse in respectful terms with Mother Nature herself. Apart from working out what ends money policy should serve, we must decide who decides. The Populists had an answer to these questions, although, admittedly, they had not considered the need for ecological restraint. At least they understood the need for public control of that quintessentially public asset, the money system. Perhaps now we can pull back the wizard’s curtain that hides what the money gnomes at the Federal Reserve and in the money center banks are doing, and return that aspect of our public life to a “government of the people, by the people, and for the people.”
- Alexander Hamilton, in a speech to the Constitutional Convention, quoted in Morrison, Samuel Eliot, and Henry Steele Commager, “The Growth of the American Republic,” 1950, vol. 1, p. 333.
- The Virginia legislature adopted these resolutions on December 16, 1790. The spur was that Congress — in its very first session — had decided that the federal government should assume the debts of the states incurred to prosecute the War of Independence, and to pay them off at par, even though many of the original holders had sold them at a ruinous discount to speculators and manipulators. Richard Hofstadter, “Great Issues in American History,” New York, 1960, vol. 1, p. 152.
- Much of the discussion of the Populist movement that follows is dependent on William Greider’s magisterial study of the Federal Reserve and its antecedents: “Secrets of the Temple: How the Federal Reserve Runs the Country,” New York, 1987.
- For a description of the current bank-dominated money system, see my article entitled “The Money System: A Fantasy (and It’s Been Privatized)” in the December, 2014 issue of Whatcom Watch. http://www.whatcomwatch.org/php/WW_open.php?id=1802
- Like the discussion of Populism, this section of the article is dependent on Greider’s “Secrets of the Temple” (see endnote 3).
- Friedman, Milton, and Anna Jacobson Schwartz, “A Monetary History of the United States, 1867-1960,” Princeton University Press, 1963.
- Braudel, Fernand, “The Structures of Everyday Life: The Limits of the Possible,” New York, 1981.
- Quoted at Greider, p. 243.
- Quoted at Greider, p. 262.
- Greider, p. 261.