“It is a characteristic of wisdom not to do desperate things.” —Henry David Thoreau, Walden (1854)
Long ago, in a universe of sane fiscal policy far, far away, there existed an institution, then new to the world of international banking and finance, called the Federal Reserve Bank, whose primary concern of the day—the day being its official charter on Dec. 23, 1913—was to have very large reserves of cash backed by even larger reserves of gold that were enough “to earn the public trust.” It was an unusual kind of organization, where simple policy directives such as “safety and sound judgement,” “lawful money,” and “normal monetary order” possessed none of the sophisticated reasoning of “zero-interest-rate policy,” “helicopter money,” “Target Asset Relief Program,” and “quantitative easing” that characterized the Bank’s latter-day ne’er-do-well progeny. Few American bankers at the time really even wanted a “Fed,” fearing that the public—and the bankers themselves—would not understand what its mission was not: that is, to not be an endless source of easy credit and bailouts. Indeed, it was altogether another world.
That world, in turn, had prestigious ancient bloodlines in the old country. A Venetian law of 1403 on reserve requirements became the basis of U.S. banking law on deposits of public wealth in the late 1800s. The once mighty Bank of France was wisely admonished by its founder, Napoleon, never to allow France to be a debtor nation, only a creditor nation. The Bank of Russia once held the highest gold reserves in the world at the turn of the 20th century, and went through the Crimean War, the Russo-Turkish War, and the Russo-Japanese War with its finances intact and sound fiscal policy. Classic Switzerland, with “unlimited liability” private bankers (not “private banks”) and debt-ceiling ratios, had larger bank reserves than the U.S. in the first half of the 20th century. The U.S. continued to keep the flag flying of this tradition in the form of the July 1944 Bretton Woods Agreement, which was established upon worldwide trust in U.S. financial discipline. Central banks in Europe held dollars, rather than gold, based upon the post–World War I gold exchange standard (different from the “classic” 19th-century gold standard). “Its indispensable core function was to impose a rough discipline on each nation to live within its means,” as the economic historian David Stockman wrote in The Great Deformation: The Corruption of Capitalism in America (2013). When President Richard Nixon eliminated this last vestige of the gold standard in August 1971, “it unshackled the central banks in a manner never previously experienced in modern financial history.”