“Just a second before we leave Europe entirely. What happened after the war?”
“We don’t know, Perry. Not in any great detail. The Non-Intercourse rule has never been fully lifted and we have never resumed commercial or diplomatic relations. The population is increasing slowly. It is largely agrarian and the economy is mostly of the village and countryside character. Most of the population is illiterate and technical skill is almost lost. Our knowledge is incomplete although we maintain missions in several places for ethnological and sociological study. But now can you tell me what happened after the assassination of Malone?”
“Well, LaGuardia took office in 1951 and served two terms. The chap that directed the recording seemed to think that his biggest achievement was a change in the banking system. He called it the Battle of the Banks.”
“Yes, and it is important for it was a change that made possible our present economic system.”
“Wait a second, please. What is the present economic system? Diana says it isn’t socialism. Is it capitalism?”
“You can call it that if you like. I would suggest that you think of it as privately owned industrialism for the time being. LaGuardia destroyed capitalism as you knew it. He started out to found a publicly owned bank, the Bank of the United States.”
“Wasn’t the Federal Reserve Bank still in existence?”
“Yes, but the Federal Reserve was not, despite its title, a publicly owned bank. Nor was it a bank in the common use of the term. A private citizen couldn’t borrow money from it nor place money in it. Only bankers could use it and they owned it. LaGuardia wanted to set up a real bank that would be owned by and used by the people. But the bankers fought him in every way. They controlled most of the newspapers, owned a good piece of the wealth in the country, and held mortgages of one sort or another on the rest. Their position was very strong in machine politics, too. So they set out to defeat him. And that got him angry. It appears from what we can find out that it was never safe to get the ‘Little Flower’ angry. He jammed his banking bill through by a combination of personality and intimidation and announced to the whole country that he was ready to lend money to all and sundry who might be refused credit at the private banks. You see the banks had created a panic and a wave of fear by calling loans and refusing to loan more money. LaGuardia restored confidence even before he was able to set up the machinery for handling a banking business. And by now LaGuardia was not willing to let things drop just by setting up his new bank. He had intended it primarily as a fiscal agent of the government to aid in the manifold financial dealings of the government with the citizens, started by Franklin Roosevelt. LaGuardia became determined to break the private bankers. He called in several students of finance and studied the theory of credit himself. He became convinced that ordinary commercial financing could be done for a service charge plus an insurance fee amounting to much less than the current rates of interest charged by banks, whose rates were based on supply and demand, treating money as a commodity rather than as a sovereign state’s means of exchange. He proceeded to lend money on this theory. His cost accountants figured pretty accurately the service charge necessary and estimates were made to cover insurance. As the system developed the insurance feature was simply the pro-rate of the losses of the preceding fiscal period. The types of loans the government would make and the quality of paper it would discount kept the losses low and within a year the federal government would loan money to its citizens at an average interest of three-quarters of one per cent per annum.
“Then he dealt his final blow. His new banking law permitted the government to regulate the percentage of fractional reserves that private banks were required to keep on hand to meet withdrawals by depositors. As you may know if you have studied the banking laws of your period, the so-called fractional reserve was a dodge whereby a banker could loan money he didn’t have and never had. It actually permitted him to create new money, based not on gold, nor on his own credit, but on the credit of his customers. LaGuardia proceeded to regulate with a vengeance. He ordered fractional reserves increased in a program that called for one hundred per cent reserves at the end of three years. The disgruntled bankers made a test case and took it to the Supreme Court. The Solicitor-General argued that the law and the order made under its authority were not only constitutional but that fractional reserves as hitherto used were clearly in violation of the constitutional provision giving Congress the sole right to coin money and regulate the value thereof. The Court upheld the administration on all counts in a famous decision written by Mr. Justice Frankfurter, and the manipulation of the money power was destroyed in the United States.”