The banks could now inflate more radically and more in unisonthan before the war but, when they pushed too far and too fast,their bank-generated booms still collapsed into recessions. While this could be highly profitable to the banks, it was also precarious.
As the American economy expanded in size, the magnitude of thebooms and busts increased also, and it was becoming more andmore difficult for firms like Morgan & Company to safely ride outthe storm. There was a growing dread that the
In addition to these concerns was the fact that many statebanks, mostly in the developing Southern and Western states, hadelected not to join the national banking system and, consequently,had escaped control by the Wall-Street-Washington axis. As thepopulation expanded south and westward, much of the nation'sbanking moved likewise, and the new banks were becoming anincreasing source of competition to the New York power center. By1896, the number of non-national banks had grown to sixty-one percent, and they already held fifty-four per cent of the country's totalbanking deposits. By 1913, the year in which the Federal Reserve Act was passed, those numbers had swelled to seventy-one per cent non-national banks holding fifty-seven per cent of the nation's deposits.1 Something had to be done to stop this movement.
1. See Kolko,
COMPETITION IS A SIN
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Additional competition was developing from the trend inindustry to finance itself from profits rather than borrowed capital.
Between 1900 and 1910, seventy per cent of American corporategrowth was funded internally, making industry increasingly independent of the banks. What the bankers wanted—and what manybusinessmen wanted also—was a more "flexible" or "elastic"
money supply which would allow them to create enough of it atany point in time so as to be able to drive interest rates downwardat will. That would make loans to businessmen so attractive theywould have little choice but to return to the bankers' stable.
TRUSTS AND CARTELS REPLACE COMPETITION
