As Bank Reform Vote Nears, a Jeffersonian Perspective

2 years ago

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One can imagine how troubled our Founding Fathers might be at the extent of the problems facing the United States. The most upset of them all would likely be the author of the Declaration of Independence, Thomas Jefferson. Our third president would be surprised about many aspects of modern America, such as the collapse of states' sovereignty and the influence of religion in government, but he might find the state of our banking industry to be the most depressing.

The humble gentleman from Virginia had a rare and passionate hatred of banks. He greatly feared the power and reach that banking institutions could have in the United States. One of Jefferson's most widely quoted letters, written in retirement, states his belief "that banking institutions are more dangerous than standing armies." Jefferson's chief fear of banks was that they, as a small, central institution, were prone to corruption and to manipulating the finances of the nation.

Now that banking institutions have begun to stabilize after the bailouts and bankruptcies brought on by their housing market risks, legislators are debating how to prevent such occurrences. Paul Volcker, a former Federal Reserve chairman and current Obama adviser, has proposed restricting banks from making proprietary trades and speculative investments that do not benefit their customers. What has been dubbed the Volcker Rule would revive some of the reforms instituted by the Glass-Stegall Act, which was effective in regulating banks until it was partly repealed in 1980 and 1999.

Recently, Senator Dodd presented the Democrats' plan for banking reform, which pursues a different path than the one proposed by Volcker. The centerpiece of the plan, which may come to a Senate vote next week, would be a Consumer Financial Protection Bureau contained in the Federal Reserve.

It's easy to envision Jefferson applauding the efforts to establish regulation and size limits for banks while being wary of trusting enforcement to another powerful, though independent, government entity like the Federal Reserve. His attention turned to banking when he became our nation's first secretary of state in George Washington's cabinet. The primary issue then was Treasury Secretary Alexander Hamilton's plan to create a National Bank of the United States.

Jefferson feared that a national banking authority would have the power and wealth to subvert the will of the people. Hamilton advocated (and briefly succeeded in establishing) a strong, central institution and a large national debt as a way to stabilize and form the national American economy. The legislative regulation proposed by Volcker aligns more closely with Jefferson's democratic ideals, as opposed to the independent executive authority of the Fed, which may be prone to overreach.

Many people, especially progressives, feel that Dodd's plan doesn't go far enough and that centralized financial regulation will prove insufficient. Grassroots movements to peel back the powers of banks have begun to appear, including Arianna Huffington's "Move Your Money" campaign for citizens to transfer their money from big banks to smaller "community" banks that are more conservative and traditional managers of deposits. Supporters have been trying to advance this cause by getting their neighbors, businesses and universities (including my school American University) to switch their banks.

Regardless of the results of the congressional push for reform, the Sage of Monticello would have been thrilled to see a grassroots effort aimed at reducing the power of banks. But it is clear that top-down and bottom-up reforms are needed. We can only hope that Jeffersonian ideals influence the key moments of the process.

Filed Under: Economy, The Cram

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