Since Lehman collapsed in 2008, central banks have broken free of historical norms, channelling trillions into the banking system to prop up global finance and the savings of depositors from Germany to Hong Kong. The corona crash has only accelerated this emancipation. In April, the Bank of England helped the Johnson government finance an ambitious furlough scheme, while the European Central Bank stepped up their older quantitative easing program, pumping liquidity back into the bank sector. Swap lines by state banks have been set up in the United States, while the latest European recovery plan ratified an extension of the Pandemic Emergency Purchase program. Adam Tooze cast all of this as “a remarkable display of technocratic energy and imagination in western financial centers”—necessary to both “control the epidemic” and “restore the world economy.”
Among these institutions none possess as much luster as the American Federal Reserve. While other banks waver or bow to political leadership, the Federal Reserve’s action is swift and decisive, protecting against financial collapse at home while safeguarding assets abroad. Unsurprisingly, the Fed is often singled out as one of the greatest triumphs of capitalist statecraft, from its creation in 1913 under Woodrow Wilson to its decisive role in the neoliberal counterrevolution of the 1980s under Paul Volcker. Yet while the bank seemed deeply conservative for the intermittent period, its proactive capacity asserted itself with a vengeance in 2008, when Timothy Geithner’s New York Fed almost single-handedly saved the global financial system from collapse.
Such displays of sweeping and decisive action have warmed even some on the left to central bank power. Rather than rejecting the institutions forged by the capitalist class, progressives have recently called for the power of central banking to be harnessed towards newly imagined social ends. As Benjamin Braun noted in a representative piece, “central bank planning is already here.” The task is to “turn the financial system into a utility-like sector geared towards the public good.” Similarly, Quinn Slobodian envisions central banks facilitating a transition to “economies where uncertainty and hardship are diminished, even after coronavirus has passed.” The Fed might serve as a capitalist savior today, but it could become a weapon for progressive finance tomorrow.
What would that entail, beyond liquidity injections and conditionality clauses? And to what extent can we reasonably expect “technocratic energy and imagination” to deliver them? The quiet consensus is that central bank stabilization remains necessary for the survival of the current economy. In undertaking stabilization, however, central bankers also increase existing inequalities and empower economic elites around the world. Even if today’s central banks could be democratized, that “democratization” by itself will be insufficient if their field of action remains constrained, shying away from a more ambitious mandate of redistribution and the reorientation of long-term investment.
The full possibilities, and limits, of present calls for the reform of central banking come into sharp relief when examined in light of the radical campaigns of the American Populist movement of the late nineteenth century. Indeed, early proposals for a Federal agency that could seize the power to print money and redistribute credit originated not among bankers and the accredited, but among an agrarian population desperate for credit and investment—the Farmers’ Alliances of the 1870s and 1880s and the American People’s Party of the 1890s. While the Fed might be, in Ann Pettifor’s words, the “world’s unaccountable central bank” and its governor the “technocratic leader of the world,” some of the Fed’s early advocates were hardly elitist satraps. America's agrarian radicals formulated bold visions of central banking wielded by the people, as an instrument of capital allocation, developmental state policies, and ultimately a transformed political economy.
The American Populist movement might seem an unlikely progenitor for the current Federal Reserve. A coalition of mainly Southern and Midwestern agrarians, the Populists and their People’s Party arose out of a flourishing co-operative movement, revolting against low grain prices, scarce credit, and steep freight rates. The party ran for president in 1892, Congress in 1894, and fused with the Democrats in 1896, only to disperse across the political spectrum afterwards.
More than any of their contemporaries, the Populists obsessed over questions of monetary centralization and control—and their rebellion against reigning liberal orthodoxy nurtured in them a highly experimental approach to the “money question.”1 It was not without precedent. Since the 1860s, when President Lincoln introduced greenbacks to fund the Civil War, the idea that the American state might use its authority to control the money supply from private banks had already stirred the radical imagination. Populists extended these greenback efforts into the 1880s. One of the most pressing problems of the decade was the scarcity of credit and currency in rural areas, which drove an infernal spiral of deflation and price depression. Loosening and widening the base of currency, Populists claimed, would fuel productive investment, raise the price of agricultural produce, and break the power of established merchants, whose hold on currency often went hand in hand with price gouging.
The most recurrent Greenbacker response—pushed by businessmen, small farmers, and intellectuals alike—to the problem of deflation was a more elastic money supply and so-called fiat currency, terminating America’s attachment to the gold standard. Once this “sound” money dogma was broken and the monopoly of private banks was brought to an end, a fully public bank could freely issue currency and lessen the stringent credit conditions of merchants and corporations. Affordable credit would flow back to regions and sectors underserved by existing private arrangements. Here, central bank reform and opposition to the gold standard formed a natural pair.
Moving the United States off this standard was a bold endeavor in itself. It required the US government to reclaim private banking prerogatives and start issuing currency. Populists devised a specific version of this public money proposal. The most interesting of these was developed by Texas businessman and self-taught heterodox economist Charles Macune. In the late 1880s, faced with the failure of a more voluntary approach that relied on farmers’ co-operatives, Macune began to rethink the American state’s role as a provider of credit in what he called a “subtreasury” plan.
The plan’s set up was as radical as it was simple: the subtreasury would allow American farmers to store their grain and other commodities in government-tended warehouses and grant them interest-denoted vouchers, valid for up to a full year, based on the amount of grain they stored. These vouchers would circulate as money—not unlike gold—releasing farmers from costly borrowing and freeing them to wait for opportune times to sell their crops. The plan implied a system of state banks that could tend this deposit system and redirect capital into agrarian communities. Macune partly drew on the French socialist Pierre-Joseph Proudhon’s proposals for a “people’s bank” in these writings, which had also sought to facilitate credit creation across society.2 Envisioning a democratic credit system, Macune hoped to update Lincoln’s vision of a community of smallholders to a corporate era.
None of these measures came to pass. Macune’s sub-treasury was laughed away in polite society as financial illiteracy, and America remained on the gold standard for more than twenty years. There was, however, partial victory in defeat for the Populists. Congressmen in the early twentieth century relied on large farming constituencies, and state legislatures were still packed with many ex-Populist figures.
Populist legacies continued to pervade American politics and guaranteed that the debate about central banking did not become the exclusive domain of bankers and financiers, narrowly focused on market volatility. It remained, rather, a significantly politicized terrain with a wide array of participants who claimed the institution’s vast distributional and developmental implications. As Nadav Peer has shown, agrarian lawmakers were intent not merely on shoring up the nation’s crisis-prone financial system, but also on recasting the US economy through reallocation of credit across sectors and geographical regions.3 The policymakers who created the Fed aimed to dislodge the corporate sector’s privileged access to the reserves of the national banks, which circulated via Wall Street brokers. Pushing back against the gravitational tendencies of American banking, they sought to shift resources away from New York to rural communities around the country.
To execute this gambit, members of Congress from the agrarian periphery defeated the “Aldrich Plan,” authored in collaboration with New York bankers and Harvard economists, for a privately-controlled central bank. Instead, as Elizabeth Sanders has shown, they pressed for a publicly-owned and highly decentralized system, with semi-autonomous regional reserve banks making funds available throughout the nation.4 They aimed to provide cheap credit to noncorporate borrowers, especially in the Midwest and South. They also pushed for the Fed to accept agricultural land as collateral (prohibited to national banks under the existing national system) and extend credit against instruments of exchange that were pervasive in the agricultural parts of the economy. Their explicit goal, as one proponent explained, was “to withdraw the reserve funds of the country from the congested money centers and to make them readily available for business uses in the various sections of the country to which they belong.”
President Wilson’s temperament and background tallied badly with the radical bent of these reformers. So did the American Bankers’ Association, which condemned these proposals (in a sentiment echoed by respected economists, the New York Times, and other elite organs) as reckless and “socialistic.” Nevertheless, as the Federal Reserve Act moved through Congress, questions of economic distribution—of power and resources, not merely economic volatility—continued to take center stage. Wilson’s Secretary of State William Jennings Bryan (the former bimetallist candidate for President), along with Democrats and Republicans from rural, credit-starved states touted the old Populist line. American banking, they insisted, suffered not from overeager country banks on the periphery, a critique that called for closer supervision from a central authority. Rather, the control of credit had been monopolized and needed to be seized from a tight cohort of Northeastern bankers. They therefore pressured Wilson to include local banking provisions and more dispersed credit facilities in the law. They wrote provisions into the bill that lowered gold reserve requirements and made agricultural paper and warehouse receipts eligible for discounting at regional reserve banks. Finally, they successfully bargained for Federal Land Banks, which massively expanded the availability of credit to farmers at low rates.
The final Federal Reserve Act was not the pristine expression of any single faction. Instead, it bore the marks of an extraordinarily contentious legislative process. Bankers warned that it put the credit of the “American people” behind anybody who could “draw and sign a bill currency.” Agrarians, in turn, noted that the Act handed the bankers a powerful system that would be relatively insulated from democratic control. Bankers proved the more reluctant party. Congressional representatives from urban-manufacturing regions, with strong business influence, voted against the bill. Agrarian representatives in Congress from both parties overwhelmingly supported it, finally carrying it through Congress. As a genesis story, the making of the bill exudes a deep historical irony. The capacious and resilient Fed that elites inherited (and ultimately co-opted after the First World War) was not an institution of their own design.
This agrarian Populist origin story might explain why celebrating the Fed’s capacity for stabilization feels historically constraining. But “stabilization” is precisely the reason technocrats have celebrated the Federal Reserve’s actions, both at home and abroad. In the Great Financial Crisis, it refueled an ailing financial system in the US, and in 2009 it stepped into the brink and set up swap lines for struggling European banks. The move was a harbinger of an even more ambitious global role, in which the Fed extended its reach to nearly every banking system on earth. This thrusted a waning American ruling class into the role of a global financial hegemon, losing its industrial capacity while gaining strength with its money supply. (As one recent critic put it, “the United States is not a country with a central bank; it is a central bank with a country.”)
But does the current economy deserve to be stabilized? In a world with massive inequality and concentrated asset ownership, central bank stabilization inflates corporate balance sheets and blows property bubbles. The results are plain to see. Fed rescue operations cemented the power of financial classes in countries such as Brazil and Turkey, fueling authoritarian backlash. In Europe, QE has turbocharged asset inequality and granted ever more power to shareholders. From the US to the UK and beyond, stock markets have been buoyed by share buybacks on a massive scale. Rushing to cleanse the economy from systemic risk, central banking crisis relief propped up a fundamentally unjust and irrational market system.
Just as stabilizers do not often ask the question what is worth stabilizing, democratizers tend to elide the question of which institutions are worth democratizing. Too often, plans for bottom-up finance seek to democratize a body whose capacity is little more than a modulator of money flows, without the authority to allocate capital. When they do imagine a democratic and expanded central bank mandate, they do so without a robust sense of expansion in the broader transformative sense, the one which undergirded the Populist period, when “people’s banks” were only a part of a broader repertoire of anti-oligarchic measures. With a view to this history, a truly democratic central bank is still difficult to fathom.
Today’s Fed hardly represents the “people’s bank” Populists had in mind. Macune’s sub-treasury was more of a public investment bank than a global lender of last resort. The Populist vision emphasized the ability of people's banks to meaningfully skew market allocation of credit and proactively channel capital flows—activities which contemporary central banks do their best to minimize. As Margaret Myers5 explained in her canonical work, one of the agrarians’ main priorities was to make available not only commercial credit for exchange, but also “long-term credit for the development of new land and new industries.” This sense of urgency around investment in fixed capital made sense in a settler society with a rapidly expanding frontier. Indeed, as representatives from the periphery (farmers and country bankers, but also small manufacturers) repeatedly explained during the Congressional hearings on the Fed, their shared prosperity rested not only on improved liquidity but also on the availability of long-term loans, collateralized by land, livestock, and future crops. This idea of a central bank—anathema to conservative city bankers—closely resembled the financial institutions wielded by many postwar developmental states, in Europe6 and elsewhere,7 which served to spur productive investment and stopped capital from entering into an unproductive rentier mode. At the end of the nineteenth century, American states, too, had a variety of these developmental tools at their disposal, from railroad commissions to antitrust laws to legislative checks on corporate behavior.8
Reading Populist banking proposals offers three important perspectives on central bank history. For one, it destabilizes a hard opposition between accountability and unaccountability: the question of control over central banks remains important, of course, but it should not obscure the equally important question of what central banks do. As a bottom-up coalition of farmers and workers, Populists cared deeply about popular input and control; their 1892 adoption of the referendum and popular recall of Supreme Court judges spoke to this legacy, as did their persistent skepticism on the prerogatives of a growing administrative state. Yet the notion of direct control of this bank could never outweigh plans regarding its capacity for action—first and foremost when it came to egalitarian credit allocation. For this reason, when push came to shove, populist legislators agreed to surrender some power to a discretionary agency. In terms of content, a Fed with a democracy deficit was better than no Fed at all.
The history of the Populist plans for the Fed also shifts the debate from stabilization and redistribution to predistribution. American farmers in the late nineteenth century leveraged relatively good access to credit, facilitated in part via political means, to seamlessly assimilate farm improvements such as plows, threshers, harvesters, and fertilizers. This process not only nurtured a highly productive agricultural sector compared to other expanding frontiers around the world, but it also expanded rural demand for manufacturing goods, forging the famous “agro‐industrial complex” that transformed the US into a heavily industrialized economy.9 In the same vein, an expanded, truly democratic central bank would alter the very terms on which political economy operates.
Finally, the Populist story gives historical heft to some recently floated reform schemes. Central bank planning might already be here and simply be awaiting democratization, but it's hardly unprecedented. Rather than a historical departure, the democratic empowerment of central banks could fulfill deep-seated democratic aspirations, articulated by farmers, workers, and craftsmen in the turmoil of the First Gilded Age.
Sklansky, Jeffrey. Sovereign of the Market. The Money Question in Early America. Chicago: University of Chicago Press, 2018. ↩
Proudhonist plans for universal “free credit” drew particular ire from Karl Marx, whose Grundrisse notebooks feature Proudhon as a chief nemesis. ↩
Orian Peer, Nadav, "Negotiating the Lender-of-Last-Resort: The 1913 Fed Act as a Debate Over Credit Distribution", Tulane Public Law Research Paper, No. 18-8, 2018. ↩
Sanders, Elizabeth. Roots of Reform: Farmers, Workers, and the American State, 1877-1917. Chicago, IL: University of Chicago Press, 1999. ↩
Monnet, Eric. Controlling Credit: Central Banking and the Planned Economy in Postwar France, 1948–1973. Cambridge University Press, 2018. ↩
Amsden, Alice H. The Rise of "The Rest": Challenges to the West from Late-Industrializing Economics. Oxford: Oxford University Press, 2004. ↩
Stefan Link, Noam Maggor, "The United States As A Developing Nation: Revisiting The Peculiarities Of American History", Past & Present, Volume 246, Issue 1, February 2020. ↩
Meyer, David R. "Midwestern Industrialization and the American Manufacturing Belt in the Nineteenth Century." The Journal of Economic History 49, no. 4, 1989. ↩