Writing about the recent bailout of Bear, Stearns, Thomas Sowell notes in his column today that almost exactly a century ago during the panic of 1907, J.P. Morgan’s firm was crucial in stopping a bank panic that could have roared through the financial system. J.P. Morgan was also instrumental in the recent bailout, but with a critical difference: In 1907 only private money was involved whereas this time the Federal Reserve is creating new money out of nothing to finance the deal.
Does it matter? It sure does. The value of money goes down when the Fed creates new money. We call it “inflation” and the Fed is responsible for it, although politicians prefer to blame “greedy” businessmen for increasing prices.
Furthermore, having done one bailout of a firm that made a lot of bad loans, the rails are greased for more of them.
It was the Panic of 1907 that led to demands by some politicians for the creation of a central bank similar to those in Europe and as a result, we were stuck with the Federal Reserve System in 1913. That was a classic case of making the wrong move. The banking panic problem could have been solved by liberalizing our banking laws, especially allowing interstate branch banking, but instead we went the wrong way, adopting a big government “solution” that has led to problems of far greater magnitude than we could have possibly had otherwise.
