Saturday, December 28, 2019

Murderous Missouri: Civil War 1861-65

I recently came across some of the Civil War history of Missouri and much to my surprise it’s a whole lot more dramatic than I realized.  A so-called neutral state, I presumed they were largely sitting out things until the conclusion of the war. Simply a backwater with none of exciting massive battles encountered in the main theatre of the War. I was completely wrong. Missouri was a fustercluck of internecine warfare, ambushes, senseless murders and summary executions along with depopulation of several western counties under Order 11. State of Missouri was a theatre of the Civil War, far more remarkable than one generally imagines.

Missouri despite only 9% of their population slaves had a large measure of Southern sympathy. The majority were not prepared to sever their ties to the Union however. The decade prior Missouri was party to the Kansas civil strife centered on the slave question. The Compromise of 1850 did not prohibit slavery in the territories gained in the Mexican War (1846-48) except for the State of California. This meant the territory west of Missouri, Kansas, was open to slavery. Missourians had originally presumed that Kansas would be settled as a slave state. The Kansas-Nebraska Act 1854 upended the Compromise and put the issue of slavery up to popular will. In 1854-55 armed Pro-slavery Missourians crossed over to Kansas to intimidate and vote illegally, led by Missouri’s most prominent politicians. Pro-slavery candidates carried the day and a pro-slavery constitution was enacted.

A mini-civil war ensued. Border men formed squads raiding opposing partisans. Slave-steeling, looting, arson were common. Infamous John Brown led a raid where five pro-slavery partisans were cut down by sabers on May 24, 1856 in southwest Kansas. Later, a band of pro-slavery partisans massacred ten free-soil men on the Marais des Cygnes River, Kansas. Kansas due to a large influx of settlers from the East, actively abolitionist, voted to prohibit slavery in 1858.

Missouri had a Democrat governor and legislator when the Civil War began. Most the residents of Missouri didn’t want to succeed from the Union but wanted to stay neutral. Missouri’s Democrat Governor Jackson hoped to lead Missouri out of the Union. A convention convened in January 1861 but secessionist delegates were outvoted by 80,000 votes. The convention chose to remain in the Union.  When Lincoln called for 75,000 volunteers to subdue the South, four states in the Upper South chose to succeed in response to Lincoln’s call. Missouri didn’t follow them out of the Union. Yet, Governor Jackson refused to comply with the Lincoln’s request for a contribution of four regiments.

Despite remaining in the Union, great antagonisms existed in the state. A small Minority wanted Missouri to pursue a Unionist policy and support the propagation of war against the South. A segment wanted to fight with South. The majority wanted to be left alone, but five years of hostilities prior to the outbreak of the Civil War had left lasting and profound antipathies. The Union military was highly suspicious of the Missouri populace and acted accordingly with prejudice against Missourians.

Governor Jackson with Confederate sympathies raised a State Guard of 800 volunteers, called together at Camp Jackson, and obtained cannon with the complicity of Confederate President Davis in early May 1861. They were to have ransacked the massive Federal Arsenal at St. Louis some 30 miles away. A certain Captain Nathaniel Lyons, veteran of the Mexican War, was appointed to command of Union forces in St. Louis. Arms in the arsenal are transferred out of reach of the Missourians across the Mississippi to Illinois. Three thousand Union troops are led to surround Camp Jackson’s 800 member State Guard outside St. Louis, who summarily surrendered without a fight. When Union troops marched back through St. Louis they are harassed by St. Louis citizens. These troops fired on the crowd killing 28 and wounding scores. This would not be Captain Lyons only experience in murdering civilians; he was in command at the Clear Lake massacre in 1850 in California were scores of noncombatant Native Americans largely women, children and aged individuals were slaughtered. His contemporary reputation was unsullied by these savage encounters and deemed a hero, who died fighting to preserve the Union.

In response to the St. Louis massacre Governor Jackson led the Missouri assembly to fund a State Guard that would work toward Confederate interests. Nathaniel Lyons, now a Union Brigadier General raced 1700 troops up the Missouri river in June 1861 to Jefferson City the capital, finding it empty of Missouri governmental and military personnel, occupied the capital.  He went further to Boonville to vanquish a small State Guard unit under Colonel Marmaduke.

A state convention was reconvened July 20, 1861 in St. Joseph, recently occupied by Union troops. They abolished the legislature, removed Governor and lieutenant governor and filled them with candidates of their choosing. An oath of allegiance to the Union was instituted for all state and county officials. And it reserved the right to remove any public official suspected of disloyalty: policies imminently favorable to preservation of the Union but contrary to the republican principles under which the country was founded.  No constitutional or legal precedents legitimized their acts. The convention operated essentially outside the law, taking the judicial, legislative and executive functions of government.

General Sterling Price, former governor of Missouri, with hopes to re-conquer Missouri for the Confederacy, led a largely failed military campaign in the summer of 1861. Price’s short term recruited troops melted away by summer’s end. Efforts to recapitulate State Guards, here and there in the state, were easily snuffed out. When a group of a couple thousand might begin to gather in a county to congeal the State Guard, the Union troops would conveniently scatter them. There were some 10,000 Union troops patrolling the rivers and railroads but that was far too few to stop the guerillas. A guerrilla campaign of burning bridges, destroying telegraph lines and railroad tracks ensued.

General Halleck, head of the Department of Missouri, soon to be Army-Chief-of-Staff to Lincoln, in December 1861 issued order Thirty Two that called for summary execution of anyone caught in the act of burning bridges, destroying railroads and telegraph wires. Those suspected of involvement in those acts would be imprisoned and if found guilty would be executed. This draconian policy didn’t extinguish guerilla activity.

Halleck pursued military operations against the Confederates chasing them out of Missouri and defeating them at Pea Ridge, Arkansas in March 1862. General Sterling Price no longer had an army; the remainder of his troops was transferred to Confederate authority. They would fight at Battle of Corinth and serve outside of Missouri for the rest of the war.

Supplied and nourished by a sympathetic population, guerilla activity continued. Many of the active participants were returnees and deserters from the State Guard and the Confederate army. They had been granted freedom by parole and a taking of oath of fidelity to the Constitution.

The biggest factor to stimulate guerilla action in the western border area after 1861 was the Union military itself. Its misconduct against the Missourian civilian population produced great hostility and was a great source of guerilla activity. The Missourian population had Southern sympathies as stated but this was not to be tolerated. General Halleck is quoted as saying, “Those who are not for us will be regarded as against us…”.

General Pope, eventually to be head of the Army of the Potomac, commanded Union troops in north and central Missouri. He made the mistake policing the civilian population uniformly whether pro-Union or pro-Southern. He held whole communities responsible for guerilla depredations. And he demanded they begin guarding the railroad track. Any subsequent damage would be levied against the local community. Pope went further and pulled the Union troops back into camps and left the communities to do their own guard and police work. When communities failed to surrender levies for the continued damages, Pope assigned his volunteer Kansan and Illinoisan army to exact payment, they began to loot, burn and mistreat the Missourians. The most notorious were the Second Kansan and Sixteenth Illinois infantry regiments. “Drunken soldiers ran the trains and stole horses and livestock.”

Pro-Union general agent, J.T.K. Hayward wrote,
When there is added to this the irregularities of the soldiery- such as taking poultry, pigs, milk, butter, preserves, potatoes, horses, and in fact everything they want; entering and searching houses, and stealing in many cases; committing rapes on the negroes and such like things-the effect has been to make a great many Union men inveterate enemies, and if these things continue much longer our cause is ruined.  
Commanding General Freemont doubled down on this regimen. He declared martial law over the entire state August 30, 1861. All property real or personal confiscated and slaves freed of all persons in arms against United States.

Continuing to stifle insurrection in October 1862 Major General McNeil commanding troops near Palmyra, north of Hannibal in near the Mississippi executed ten prisoners without trial suspected of burning bridges and firing on Federal troops. In Rolla in the center of the state Lieutenant Boyd of the Sixth Missouri Militia executed ten suspected guerrillas and burned 23 houses near the same time. Draconian measures of this type were thought called for to squelch the insurgency. It did little to smother the violence.

Three leaders contributed mightily to ignite a full-fledged guerilla war on the border. Jim Lane was a former leading pro-slavery Indiana Democrat, lieutenant governor and congressman. He moved to Kansas in 1855 only to become a fanatical Free Soil candidate. His military strategy was following closely the retreating Sterling Price’s army in 1861. He would prey on the civilian population that was left devoid of the protection of Confederate military. Exercising Freemont’s martial law declaration, his troops went on an extended looting expedition. On September 22, 1861 they had reached Osceola, Missouri, a town of 2,000. When they were done, there was little left of the town, being looted and burnt down.

Another, Charles Jennison, a free-soil fanatic and sometime horse thief, his vigilante committee hanged two Missourians attempting to steal back freed slaves in 1860 before the Civil War had even began. In June 1861 his state guard from Kansas raided Harrisonville, MO in Cass Country. Most the stores were broken into. Large quantities of merchandize were carted off in stolen wagons. Henry Younger, a prosperous businessman and a pro-Union man, lost thousands of dollars of private property. He was the father of Coleman and James Younger, who would fight with the Bushwhackers and later become renowned as train robbers.

Jennison, for his good deeds, was commissioned in September 1861 as a lieutenant colonel and his band of criminals designated the Seventh Kansas Volunteer Cavalry, also known as the Jayhawkers.
The last prominent Unionist (Jayhawker) to consider was Colonel Jim Montgomery of the 3rd Kansas Infantry; he was Second-in-command of U.S. Senator James H. Lane's Kansas brigade. Montgomery was a former Kansas border raider and fanatic abolitionist, considered himself a “hand of the Lord striking down slavery”.  He participated in the sack of Osceola, Missouri on September, 1861 that burned the town down and saw summary execution of nine citizens of the town. He raised an all-Black regiment later in the war. He’s portrayed in the movie Glory.  

Eventually, the Jayhawkers were ordered out of Missouri by military authorities only to be called back in response to disruptions by Bushwhackers to Jackson County, whereupon, they began their depredations on the currently quiescent civilian population of Independence, Missouri. Wagon loads of dry goods, groceries, drugs and “every horse, mule and conveyance they could lay their hands on.” Jayhawkers committed two cold blooded murders of men not fully cooperative during these pillages.

As stated above, in January 1862, General Halleck ordered Lane’s brigade and Jennison’s men out of Missouri. Union General Henry Halleck described these marauding bands as "no better than a band of robbers; they cross the line, rob, steal, plunder, and burn whatever they can lay their hands on”. Jim Lane was elected senator of Kansas in November 1861. He is now a senator and a military officer.
After General Halleck departed for Washington to become General-in-Chief to Abraham Lincoln on July 23, 1862. Foreign troops of Kansas, Illinois, etc. were deemed again to be the source of the depredations. They were sent away. Fourteen thousand local Missouri were raised but that yielded continued reprisals and pillaging.

The infamous William Quantrill and his Raiders activities arose as the inevitable result of these ravages. Born in Ohio, and after a series of not altogether successful careers, one of which was school teaching, farming Kansas prairie, and a trip to Salt Lake City in 1858, he went back to Kansas to teach. He had shown a tendency for larceny. He was initially caught up in Jayhawkers, oddly enough. And finally betrayed his compatriots. He found himself fighting in General Sterling Price’s army from spring of 1861 to the fall 1861 but returned to Jackson County, Missouri in November 1861, tired of standard military life.

Soon he was leading young Jackson County farmers “driven into armed resistance” by Kansans under Lane. Quantrill used hit and run tactics against much larger Union forces and be able to disperse into the countryside that they knew so well and find shelter among the sympathetic populace. He would terrorize western and central Missouri. In fact one of his most notorious raids took place against Lawrence, Kansas, home of the hated Jim Lane August 1863. Some 450 riders spread out across the town with an execution list. Seventeen Union soldiers were pistoled to death. Infamous Senator Lane only escaped by hiding in a corn patch nearby his home.

What transpired was a “diabolical, unpardonable massacre, one which has no parallel in the Civil War.” “Houses and buildings were looted, set on fire, and almost every Kansas man encountered was pistoled down. Some Lawrence men were chased like rabbits and shot down. Many tried to hide and were burned in their houses. In two hours 150 male citizens of Lawrence were killed.”1

Quantrill’s troops spirited away upon the approach of the Union cavalry, unharmed. Union reprisals followed a pace. The infamous Order 11 by General Schofield was issued in the after of the raid. Several Missouri border counties were ordered to be evacuated; the populace was forcibly removed as an antidote against any continued support of the Bushwhackers.

Quantrill would continue his marauding nonetheless until the summer of 1864. Union military pressure built and the Bushwhackers scattered into some ten smaller units. They would continue with their marauding. The Union cavalry’s efforts would be futile. Quantrill would leave the leadership under various circumstances, finding love in a romance instead.

Bloody Bill Anderson, in his early twenties, would come to prominence operating from the summer of 1863 to 1864, attacking Union troops, when it seemed advisable and preying on civilians, mostly those with Union sympathies. Calling him a criminal psychopath, albeit spawned in this chaotic milieu, is not far from the truth.  Much of what they perpetrated can be considered simply lawless activity, pillaging, looting, summary executions of Union troops and civilians. Frank and Jesse James would accompany him on many of the gang’s outrages. He operated with impunity until he was finally ambushed by Missouri State Militia in October 1864. He chose to die in a blaze of glory by charging through the Union lines, only to be shot dead twice in the back of the head.

The success of the Bushwhackers was due to several factors. They rode far better horses in comparison to the Union cavalry’s substandard mounts. They fought with two or more repeating revolving pistols on their possession which could get off many more shots than the Union contingents with the standard Army issue. Sometimes these troops were given muskets, no less. The populace was supportive and supplied them, thus the draconian Order 11 issued to vacate several border counties of Missourian residents, mostly but not all sympathetic to the Bushwhackers. The raiders rode with pilfered blue Union uniforms so in very many cases they could approach Union forces closely before detection.

After the Confederate army was driven from the state in 1862, even then it was virtually impossible to secure all railroads, trains, bridges, river boats and Union supporting citizens from the marauding Bushwhackers. The 10,000 Union troops assigned to protect Missouri Union interests were spread too thin. Pursuit of the Bushwhackers was generally futile and small Union contingents sent out to root out them were often suddenly overwhelmed by the raiders. Larger Union forces would only scatter the Bushwhackers, where they would secrete themselves in the hills.
Confederate General Sterling Price gathered a large contingent of cavalry of some 12,000 that invaded Missouri once again in the fall of 1864. The goal was to embarrass the Lincoln administration before the election of 1864 in hopes the election would turn to General McClellan who would lead the Union out of a war with the South. Here General Price employed the Bushwhackers, despite their ruthless reputation to work in conjunction with his force. They were meant to distract and harass the Union forces, but instead restricted themselves to pillage rather than attacking actual military targets.

Price had some small victories but never reached St. Louis his stated objective and decidedly lost to a Union Army on October 23, 1864 outside of Kansas City. The retreat from there ultimately led to the complete destruction of that Confederate army.

As you might know cavalry in the Civil War was not an effective force against disciplined infantry and their rifled muskets. The old musket wasn’t really effective until 40 yards and before infantry could reload the cavalry would be upon them. Rifled muskets were good at 400 yards and cavalry would be met with some thousand bullets from a small regiment, being able to reload, by the time they ever reached the opposing line. General Price’s army was largely a contingent of cavalry and ineffective against disciplined infantry, thus their unsurprising failure in 1864.
The government in Missouri during the Civil War years was installed chiefly by force of arms, undemocratically; who represented the minority Union interests. The Union military in Jefferson City supported a convention in July 1861 that arbitrarily removed the governor and lieutenant governor and abolished the legislature. Martial law was declared August 31, 1861 and remained for the duration of the Civil War. Union arbitrary, punitive actions against civilians led to resistance by Missouri civilians and to the rise of the armed partisans in the border area already unstable due to hostilities of the five years previously. For the Union prompt action against Governor Jackson and the Legislatures attempt to act on the side of the Confederacy saved Missouri for the Union. Union prejudice against the Missouri citizenry, largely based on animosities generated in the civil war fought in Bleeding Kansas 1854-1860, did much to initiate the rise of guerrilla warfare.

Michael Fellman in his fine book, Inside War, details the animosity the industrial Northern held against the more agrarian South. Despite the fact that Missouri possessed a tiny minority of slave owners (12%) most of whom held four slaves or less, the North considered this was a society where “all yeoman were debased into subhumanity by such an institution”.  Slavery was a taint on all white society. The pejorative term Northerners used to depict them was the Pukes: lazy, unindustrious, sodden with whiskey, disheveled and at best quaint relics of an antiquated agrarian past. They were symbols of a benighted cultural regress.2 The civil war fought in Bloody Kansas (1854-58) saw this attitude born out, with reciprocal response by the Missourians. Union policies in Missouri during the Civil War (1861-65) reflected the same animosities as well toward a society largely Unionist yet holding Southern sympathies.

As an example of the animosity I refer you to a speech made in the US Senate by Senator James Henry Lane from Kansas. "I would like to live long enough to see every white man in South Carolina in hell, and the Negroes inheriting their territory. It would not wound my feelings any day to find the dead bodies of rebel sympathizers pierced with bullet holes in every street and alley of Washington. Yes, I would regret this, for I would not like to witness all this waste of powder and lead. I would rather have them hung, and the ropes saved! Let them dangle until their stinking bodies rot and fall to the ground piece by piece."

I’ve touched on just some of the highlights of the disorders in the Civil War Missouri. This is a truly dramatic period with shocking criminality, violence and brutality. Much more has been written about this period. I’ve borrowed liberally from Richard S. Brownlee’s fine book, The Gray Ghosts of the Confederacy in much I write here. I highly recommend it. 
       Gray Ghosts of the Confederacy, Brownlee, Richard D., page 124.
2.      Inside War, Fellman, Michael, page 11. 

Tuesday, October 29, 2019

Retreat From Gettysburg

Lee’s retreat from Gettysburg in July 1863 was a success, as far as escaping from a hostile army after a defeat can be considered a success. The Confederate Army made it to the Potomac on the July 7th. The swollen river unfordable with the pontoon bridge destroyed, that was to have allowed them safe transit. Nonetheless, a pontoon bridge was reconstructed and the swollen Potomac River’s level dropped. The Army of the Northern Virginia would make its way across the Potomac on the night of July 13 and morning of the 14th  and live to fight on for another 22 months.

The Confederates on their retreat from Gettysburg were harassed by Union Cavalry but the six corps of the Union Army didn’t engage the Confederates in battle. The Confederates were allowed escape. General Meade was roundly criticized by the President, General-In-Chief Halleck, and any number of contemporary military officers at the time.

A true assessment of the 10 days of this retreat is an impossibly daunting task. The contingent variables of a vast army and its venue that have to be considered are legion. It's quite easy blaming Union General Meade.

A day after the third day of Battle of Gettysburg, July 4th 1863, the armies held their positions. Lee’s Army would have loved to have the Union charge entrenched positions. Meade refused to come down off Cemetery Ridge, content to stare down the Confederate forces. To have locked the Confederates in battle on the 4th may have been the key to holding Lee’s army in place and destroying him or become a tragic bloody blunder for the Union.

Lee was hoping they would attack. The futility of frontal attack was amply demonstrated in December 1862 at Fredericksburg where Lee’s army repulsed Burnside’s Union troops numerous times. Some called the effort at repeated attacks butchery. The assault executed by Pickett’s charge against entrenched positions on Cemetery Hill at Gettysburg on July 3rd becomes all the more mysterious.

After a day of waiting on the night of the 4th  and morning of the 5th  Lee’s Army began to slip away. It would march southwest over South Mountain at Monterey Gap, some 16 miles away. Elevations along South Mountain, a 70 mile long mountain from Maryland to Carlisle, Pennsylvania, were between 1500 to 2000 feet; they would be insurmountable by an army except to force passage at the gaps like Monterey that measured 1000 to 1300 ft in elevation. The ultimate destination of the Confederate army was Williamsport, Maryland some 30 miles away southwest on the Potomac River with Virginia beyond. Hill’s Corp didn’t leave the Gettysburg Battlefield until July 6th along with the 4,000 Union prisoners of war, guarded by Pickett’s Division.

As stated, Lee’s Army of the Northern Virginia was given ten days to escape across the Potomac. The army was allowed to wait for the swollen Potomac River to recede after torrential rains and the pontoon bridge previously built on the passage north below Williamsport, destroyed on the 3rd , be re-constructed. Meade, newly appointed, feared failure more than he craved success. He cautiously approached a still dangerous Army of the Northern Virginia, retreating to Virginia.

Previously, 15-20 mile long reserve quartermaster and subsistence train had left for Fairfield late July 3rd.  It contained thousands of head of cattle and sheep pillaged from the Pennsylvania countryside. The Confederate Army was constantly foraging for food stuffs and livestock, nominally paid with worthless Confederate script. It was a critical part of the reason that the Army of the Northern Virginia had journeyed into Union country. Virtually every imaginable item was subject to pillage: Clothing, grain, livestock, horses, etc.

The supply and ordinance trains of each of the three Confederate army corps would be as long as 30 miles. They slowly trudged their way towards the Monterey Gap. On the night of July 5th torrential rains poured out of the sky. The Union Cavalry was sent to reconnoiter and harass the retreat. A night battle in virtual pitch black was fought at the Monterey Gap with General “Kill” Kilpatrick’s Calvary division in pursuit. The Monterey Gap was defended by a tiny contingent of Confederate Calvary led by Captain Emack. General George Custer was the vanguard of the division in the dark and the downpour at the entrance of the road up the gap. They were shocked when Emack’s handful of Calvary began to fire on them. Emack held them up five hours. Eventually,  1st West Virginian Cavalry led by Major Capehart and his 640 contingent broke through. Some 1,300 Confederates and 250 wagons were captured.  

There were other determined but largely ineffective attacks made by the dispersed Union Cavalry in the week running up to Lee’s departure across the Potomac. General Kilpatrick attacks Hagerstown on July 6 including General Custer’s Michigan Brigade. The Confederates rally their wounded led by General Imboden along with Stuart’s cavalry to repulse them.

On the same day General Buford’s Cavalry attacked Williamsport, the site of the crossing of Lee’s army a week later. Once again Confederate wounded were called to defend themselves. A late afternoon flank attack by Confederate Fitz Lee’s cavalry brigade forced a Union retreat.

On July 6th General Meade sent out the 6th Corps under General Sedgwick in reconnaissance in strength, ordered not to engage the Army of Northen Virginia. They march 5 miles down the Fairfield road toward South Mountain. They encounter Confederate rearguard at Granite Hill. They can see Lee’s wagon train backed up in the distance. A skirmish line is sent out and is met with a bayonet charge by the 26th Georgian of General Ewell’s 2nd Corps. They scurry back to Granite Hill. The narrow Fairfield pass is up ahead past the town. Sedgwick determines battle at the narrow pass would give Lee a decided advantage. This is entirely true; once Lee goes into the mountains he has the advantage of terrain. This would be in contrast to battle the Confederate Army at Gettysburg on July 4th before Lee can break off. Lee relished an attack. 

Once Lee left and marched in the mountains the opportunity of engaging his army is lost. Afterwards, Meade fears being caught and repulsed in the mountains and hesitates.

One complication, the  supply depot for the Union Army was 24 miles away at Westminster, MD. Surprisingly, the Union army lacked supplies and short on food. General Meade had to determine if Lee was going to make a stand at South Mountain or retreat into Virginia to determine where the supply depots should be. The latter would dictate he’d be moving the supply depot east to Frederick, Md.


General Meade had taken leadership only 3 days before the Battle of Gettysburg. He had lost two experienced corps commanders in General Reynolds, I Corp, killed on first day of Gettysburg, offered the leadership of the Army before Meade but turned it down and General Hancock, II Corp, who was wounded on the 3rd day at Picketts’ Charge.

Most importantly, Meade was directed to protect Washington at all costs; this meant making certain to always interpose the Army of the Potomac between it and the Confederate Army. Thus the route to Williamsport was in fact longer (50 miles) for the Union Army than pursuit down the Cumberland Valley, Lee’s route.

Following Lee’s route (30 miles) was out of the question, ignoring all the logistic hurdles that it would have involved. It was only after it was reported that Lee’s Army was moving beyond South Mountain past the Monterey Gap did General Meade decide to begin the pursuit. Remember the Union Army is marching to the east of South Mountain to Frederick, Maryland (some 37 miles march from Gettysburg), equidistant from Williamsport. The long way around.

Meade with his staff arrives at Frederick on July 7th. The Union Cavalry once again is stymied by Confederate Cavalry at Funkstown, Maryland on the 7th a few miles southeast of Hagerstown.

 Confederate Cavalry commander Jeb Stewart forces action at Boonsboro, Maryland farther east and the Union Cavalry stops them on July 8th.  Formidable infantry 6th and 11th Corps began to arrive late in the evening of July 8th, having made forced marches of some 30 miles the day before. Boonsboro measures twenty two miles southeast from Williamsport, Maryland.

Mid-day July 7th the last corps of the Army of Northern Virginia passes through Hagerstown, Maryland just seven miles northeast of Williamsport, MD. They were about to beat the Union Army to Williamsport. The cavalry fights following the battle at Gettysburg allow Lee’s army space and time.

With the adoption of the rifled musket, lethal at 400 yards, infantry regiments have no problem defeating mounted cavalry. Infantry regiment of five hundred to fifteen hundred of men can get off thousands of accurate shots by the time they are to have been run down by the mounted horsemen. Horsemen had been the most daunting element on the battlefield for well over two thousand years, no longer. This is meant to say the failure of Meade to pursue with infantry insures Lee’s ability to reach Williamsport and fortify the army behind trenches and redoubts.

On the July 10th another skirmish was fought at Funkstown as the Union Army begins to move forward towards Williamsport. All the while the Confederates are constructing miles of formidable fortifications around Williamsport, which Mead will be very hesitant to assault.
Most of the Army of the Potomac was present by July 11th near Williamsport and waited with reluctance to attack Lee’s nine mile long fortifications.

On the morning of July 12th General Custer and his Michigan Cavalry brigade recaptured Hagerstown, some seven miles northeast of Williamsport. The Confederates are firmly ensconced behind fortifications by this point.

General Meade struggles to make a decision to attack Lee’s heavily fortified position around Williamsport. The Union Army hesitates as the Army of Northern Virginia is behind several miles of trench and breast works around Williamsport. The Confederate Army could afford to wait for the Potomac River to recede and upon the re-construction of a pontoon bridge.

General-In-Chief Henry Halleck at Washington, D.C. throughout the week continued to urge prompt action against Lee before his army was lost across the Potomac. Meade offered that troops after forced marches were short on rations and marching barefoot, accounting for the dilatory pursuit.
Lee would be able to secure retreat across the river on 13th and morning of the 14th. The Union made a tardy stab at the remnants left waiting to cross on the 14th. General Pettigrew commanded the very last remnant of the troops crossing back over to Virginia. A participant on July 3rd of the renowned Pickett’s charge, he was mortally wounded by a last minute Union Cavalry charge, thinking they were one of his own. Virtually, all the Army of Northern Virginia was able to escape to safety.

It would take General Grant to engage in a grinding war of attrition to conclude the war in April 1865. That took twenty two months and it ended with defeat of the Southern means to war and the destruction of its economy. With that effort in mind one could surmise that destruction of the Army of the Northern Virginia before the Potomac in July of 1863 would not have been an altogether straightforward task as so many have speculated.

As already mentioned, Meade’d barely been commander of the Army of the Potomac for a week by July 4th. Commanding and coordinating tens of thousands of troops is a daunting task in itself; now the leader has to decide to commit additional thousands to their deaths or possible lifelong disability. Virtually anyone placed in that position of responsibility would shudder at the thought. In no other venture are decisions laden with so much consequence. In business you lay off some people or close some stores or factories, when circumstances go awry. Even medical personal providing life and death care have the responsibility of one individual not thousands.

The irony of war is losses of thousands today may save many more later, but then it might just mean you’ve needlessly sent those thousands to their deaths for naught.

Map of the Gettysburg Retreat:
Map by Hal Jespersen,

Thursday, July 11, 2019

Panic in Wall Street 2008: An Assessment

As detailed in previous writing, Panic overcame Wall Street in the fall of 2008 and various monumentally expensive nostrums were applied. Money was wantonly thrown at the crisis. However, the result was no repeat of the bank meltdown like Great Depression, but the deepest recession since 1930’s.

Primarily, the issue lay with a housing bubble that crushed the Middle Class, whose side effect virtually destroyed the domestic auto industry and waylaid Wall Street. The Panic in the fall of 2008 occurred to high risk rollers, Wall Street investment bankers, who found their “paper”, derivative backed securities worthless. The first bank to go under was Bear Stearns in March 2008, who was purchased on the cheap with a huge loan $30 billion by the Federal Reserve by Morgan Stanley. Then Lehmann Brothers was allowed to fail in September 2008. This sent New York Stock Market and Wall Street Investment Bankers into a tizzy. Secretary Treasurer Hank Paulson garnered an $800 billion check from Congress on the second try.

In addition American International Group (AIG) ended up getting $180 billion, who offered hundreds of billions of Credit Default Swaps (CDS) as insurance for these high risk derivatives. AIG didn’t have the foresight to have the means to honor these claims.

As far as the $180 billion, all paid back eventually AIG declares. That is risible. What industry wouldn’t love to have a massive $180 billion investment loan? The government is said to have made $23 billion on the deal. Nonetheless, businesses shouldn’t expect government to fund their colossal mistakes.  I think that amount in today’s dollar sent men to the moon and back.

Just as importantly, the Fed Reserve pursued an unpublicized $ four trillion derivative buying binge. As you might know Fed Res is not very forthcoming about its operations and want to keep it that way.

Frankly, at the time I was outraged at the propping up of the so-called smartest and really richest men in the country, the Wall Street banker. This is at a time I, along with the rest of the public, was unaware of the Federal Reserve buying binge. Not forgetting the massive bailout of the mortgage generators Fanny Mae and Freddie Mac.

The bail out of the auto industry in light of the massive support of the financial sector seemed apropos, but as we’ve seen stockholders made out smartly in that with new GM’s $15 billion stock buyback after the bailout and the projected close of auto plants like Lordstown in Ohio. For that matter the auto industry is massively overbuilt in China where GM sells the most of its vehicles. Funny, U.S. taxpayer in effect bailed out an American auto maker so they could expand their business in China. In addition Ford experienced added competitive pressures from the bailed out GM and FCA (Fiat Chrysler Auto).

What was the underlying cause of the collapse? And this is the problem with economics. There’s rarely one narrative like chemistry or physics or biology. For instance the Great Depression has numerous explanations. 1929 Stock Market crash precipitated it.  Supply outstripped demand due to wealthy consumers saving too much, the Keynesian hypothesis. Greedy capitalism itself caused it, because markets can’t be trusted. A Credit Bubble prompted malinvestment which saw the collapse of the banks, the Austrian School position. The Money supply collapsed and the Banking sector failed, the Monetarist explanation led by Milton Friedman. The last explanation is the one most widely held by the economic community. Its prognosis drove Federal Reserve Chairman Ben Bernanke to inject as much money into the financial system as possible with his unheard of QE 1, 2 and 3’s. The goal was to counteract any deflation that was encountered by the banking sector and avert another collapse in the money supply and depression. The Quantitative Easings were a massive purchase of Government Treasuries Notes by the Federal Reserve which generated, out of thin air, Fed Res Note to buy them. The risk in this strategy was to ignite consumer price inflation; surprisingly it did not. It appears to have gone into the Stock Market instead. And Chinese cheap consumer goods arrived on our shore by the $ trillion to counteract inflationary pressure.

Similarly, there are a multiplicity of explanations here with the Panic of 2008. Regulatory agencies, especially the Office of Thrift Supervision, failed to monitor the practices of the mortgage lending industry. Public policy in the Community Reinvestment Act seriously erred in artificially promoting a huge increase in sub-prime lending. Fed Reserve Chairman, Alan Greenspan, allowed interest rates to remain too low for several years after the downturn accompanying 9/11 then raised them up dramatically, creating a credit bubble then bursting the bubble. Failure to bailout Lehmann Brothers in October 2008 precipitated chaos. The massive Shadow Banking sector, as large as the regulated banking industry, whose import was unbeknownst to the Fed Reserve, was allowed to burgeon unregulated. It could be said each one of those played a part in the financial disaster of the fall of 2008.

At the time in 2008 all I saw was a gargantuan rescue. The rest of the country was on its knees. Yet, it was Wall Street that got the welfare. And at one point in time in 1907 for example it was J P Morgan, the industrialist financier, and his associates that bailed each other out. And given the will, the Panic of 2008 could have been dealt with the same way. But Wall Street had been rescued so many times; they are like the proverbial welfare queen. With a significant difference, they should know better. They are the smartest and richest members of the society, the 1%! Now it’s Big Government who’s fostered this feigned dependency. The Wall Street bankers and their fellow travelers are not ashamed to cry and rage for taxpayer assistance, as if their right. Failure to salvage Lehmann Brothers is generally decried by the Wall Street Financial sycophants, as the key event that caused the whole financial house of cards. Essentially the “Where’s my free stuff?” cry heard from many sectors of modern society, but in this case from the richest, smartest group of people. Give us tons, literally, of money so we can protect the economy. Of course the rest of the economy went into the crapper, while they got gobs of money.

It was the bankers that initiated the germ of an idea that created the Federal Reserve in 1913. From then on they could absolve themselves of responsibility for the financial welfare of the economy. Admittedly, there was much, much more at play upon the establishment of the Federal Reserve Bank. At any rate, post establishment it was the taxpayer and their government that was to extricate the Banker from their own failure and malfeasance.

Interestingly, the Panic of 2008 wasn’t a failure of commercial banks (the ones that the public banks at). There were not massive and widespread failures. Specific banks closely tied to the production of sub-prime mortgage loans were imperiled and closed like New Century Financial in 2006 and Countrywide Bank in 2008 and massive failure of Fannie Mae and Freddie Mac costing upwards of $150-300 billion. But the crisis wasn’t as widespread as the savings and loan failures of the 1980’s that saw 1043 out of 3,234 fail in the 1980’s.

It was the Shadow Banking, the unregulated production and trading of derivative backed securities, in which the Panic arose. The trading was at a scale as large as or larger than the regulated banking. Wall Street Bankers highly leveraged at 30 to one Bear Stearns and Lehmann Brothers saw the “paper” (mortgage backed securities) discounted on their Repo trades (give me your cash and I’ll give you my derivative backed security). That meant suddenly the “depositor” was asking for more proof that their cash was going to be safe. These Wall Street geniuses so highly leveraged couldn’t meet the “run” on the bank and began to collapse. I can’t emphasize this enough. This was where the panic really arose; the trading of these derivative securities. Once its value was called into question there was pandemonium in the canyons in Wall Street.

And this is where it gets questionable. The Austrian position argues that the period of easy credit over several years (2001-2006) created a bubble in the housing market that popped. Too much housing on too shaky of terms crashed the economy. Fingers can be pointed at Alan Greenspan, Federal Reserve Chairman, kept interest rates artificially low providing undue amount of credit in the economy. This produced malinvestment, houses people couldn’t afford and too great of a supply. Some cities had countless numbers of houses abandoned and idle. That market was eventually cleared. People paid down their mortgages. And now the housing market is stable and growing.

The Austrian nostrum is to leave the market alone to adjust itself. Markets tend to be efficient and will sort themselves out. There will be creative destruction with a bargain sale of assets and things will start anew with a far more efficient economy. Inefficient and inept Wall Street bankers go out of business and new more efficient ones take their place. This admittedly would put a huge hole in the economy. The example that one will be directed to is the very sharp depression of 18 months in 1920-21 that was just  as sharp in its recovery. The Federal Reserve RAISED RATES, but allowed generous Fed Funds borrowing. Sharp inflation preceded the downturn. No massive bail outs or recovery programs were employed.

In 1920 the Federal Reserve Banks succeeded in this task by making funds freely available at relatively high discount rates. Somewhat surprising is the fact that there was no liquidation of bank credit nor decline in the money supply during the first six months of the downswing. Loans at commercial banks continued to increase, and member-bank indebtedness continued to rise.*

The same nostrums would be applied in the panic of 2008. It’s quite plausible that as in 1907 a leading figure, like Jamie Dimon of JP Morgan Chase, could have gathered the luminaries around to insert enough liquidity to right the banking ship and quell the panic. And let the rest collapse in creative destruction; only to quickly recover. Especially, the commercial banking system remains liquid. Of course millions lose their houses and only the Ford remains as a domestic auto producer, if the auto parts chain doesn’t disappear.  That is a very large amount of conjecture. But in Austrian thinking there would have been no Federal Reserve to artificially keep interest rates below market from 2001 to 2006, which was a key to the housing bubble and subsequent collapse of the economy.
On the other hand it’s extremely difficult for me to agree to the remedies that were actually used. The massive, gargantuan bailouts. The resulting immense transfer of wealth to the financial elites. Yet, millions unemployed, 14 millions lost their homes, but the financial elites were protected.  

The fact remains that any economic antidote must conform to the political realities. In the Panic of 2008 everyone were referencing the Great Depression of the 1930’s. It was the near destruction of the Republican Party. They were essentially in the political wilderness for 60 years with a brief interregnum 1953-55. The political outcry would sweep any party out of power if Austrian economic policies were carried out. 
So the Monetarist approach of injecting liquidity, considering the political parameters, was the most likely one. Freddie Mac and Fannie Mae were cases of government malfeasance, mismanaged and frightfully undercapitalized. Prior to the Panic they were involved in a huge accounting fraud, but stalwart supporters like Congressman Barney Frank opposed looking to close to the operation.
The Panic of 2008 can be used to illustrate the ineptitude of government regulating the money supply. Certainly the Great Depression can be for that matter.


Could there have been something else done besides throwing money at Wall Street?
The financial institutions most reliant on the largess of the Federal Reserve and the Congress should at the very least be assessed contributions to establish a Recovery Fund. The size should be at minimum a $1 Trillion or multiples thereof to match the funds needed to bail out these banksters as seen in the last debacle.

For all the seeming advantages of fractional reserve banking, they harbor colossal risks as seen in the Great Depression of the 1930’s. The massive reduction in the money supply reduced large segments of America to poverty. Loans failed and then loans were called in to meet the rush of claims for deposits by worried depositors. Thousands of banks failed. This risk of bank runs was largely solved by Federal Deposit Insurance. The smartest guys in the room created alternative financing methods in the complex derivative vehicles, that ultimately tanked the financial system.

The Austrian nostrum of gold backed money would be the steadiest solution but bank monetary creation has been a feature of financial systems in America for nearly two hundred years. Every time a bank generates a loan absent a complementary bank deposit, it is essentially creation of money. Banks make profit and borrowers gain access to financing. All Good?....I refer you back to the Great Depression, however.

Absent creative destruction, where even billionaires are rendered penniless, shoring up of financial institutions as we saw in 2008 was a massive, gargantuan transfer of wealth to the vaunted 1%. While the unconnected were left in the lurch. The result more income disparity. Thus these Too-Big-To-Fail institutions require more than simply being monitored real close, called for in the Dodd-Frank act. These institutions bound to fail need to pony up themselves to build an insurance fund in anticipation of collapse. The collapse is inevitable and the taxpayer will be asked to foot the bill, otherwise.
Will it actual reform occur? Hardly. Taxpayers are too easily duped with threats of financial Armageddon.  And democracies usually only work under crisis. Financial collapse threatens economy. Taxpayers are fleeced to bail them out. It’s a pattern.

*A Reconsideration of Federal Reserve Policy during the 1920–1921 Depression, Elmus R. Wicker

Sunday, March 31, 2019

Jackson and His Bank War

Andrew Jackson (1767-1845), 7th President of the United States, was an implacable foe of the 2nd Bank of the United States, chartered in 1816. He would veto the re-charter of the Bank in 1832. Federal deposits would be removed by 1833. Jackson won the War on the Bank, and is charged with precipitating a sharp economic downturn in the Panic of 1837. There are conflicting narratives gauging the positive and negative effects of the destruction of the bank; the standard one reports an upsurge in unregulated banking, then a sharp downturn in 1837.

Despite any previous attempts to make Jackson into a pre-New Deal Democrat, the truth is far closer to a Libertarian or a pre-Laissez-faire ally who opposed government intervention and the debt that accompanies it. He advocated no subsidies (bounties) to native business or protective tariffs as did Hamilton, the first Treasury Secretary, nor a central bank regulating currency and banking. Incidentally, part of Jackson’s program was to pay off all Federal Debt, which accomplished as well on January 1, 1835.

He did masterfully summon popular sentiment into electoral success by demonizing the 2nd Bank of the U.S. The bank was seen as a repository of privilege for the wealthy, exercising undue influence on Congress and granting sweetheart loans to its cronies. And that characterization was largely true; the President of the Bank, Nicholas Dibble, attempted to exercise political influence (something that is done massively today but then again has been carried out through history of legislatures: it’s called buying votes). It must be noted that the 2nd U.S. Bank had about 25 branches all east of the Mississippi, so it was felt is had extensive influence across the nation.

Jackson’s Populist charge against the wealthy privilege of the Bank resonates most with modern day Liberals. Otherwise Jackson is devoid of any resemblance to New Deal advocacy of large scale governmental guidance of the economy and measures to address perceived income inequalities.

Beyond this negative characterization of the Bank, New York financial interests were opposed to the Philadelphia sited bank. Its demise would further New York as the financial center of the bank. Jackson’s Kitchen Cabinet of informal advisers had more than one banker and industrialist, especially Amos Kendall, the future investor in the revolutionary technology of instant communication, telegraph. Credit expansion was highly appealing to them. The U.S. Bank countered private banks by calling them to redeem their bank notes. That policy reduced the amount of specie that Southern and Western banks could expand credit on. Absent the U.S. Bank, fractional reserve banking could proceed with fewer restraints.

Once Federal deposits were removed from the bank, the Jackson circle had their “Pet” banks that the Federal deposits were transferred to. Private state banks had less supervision in creating bank notes and an untoward expansion of the money supply took place. (See below for a counter narrative to this synopsis.) This inevitably leads to a Crash as the state private banks overextended themselves. Out of 850 banks in the country 343 closed and 62 partially failed. This is the risk of fractional reserve banking. Once confidence is lost then there are runs on all the banks, even healthy ones. It becomes a musical chair of money. Somebody will find themselves without a deposit to withdraw. In addition bank will call in loans for repayment, trying to obtain funds to pay the depositors. A real “It’s a Wonderful Life” scenario.

Permit an aside. Deposit insurance was to have solved that the problem of runs on the banks, but didn’t help in the Panic of 2008. The government was terrified of the consequences of the failure of Wall Street banksters and their counterparties with their highly leveraged financial schemes involving derivatives. The Wall Street genius’ had outwitted themselves. Even AIG that was to have backed up the risk was hopeless underfunded. Time for the U.S. taxpayer to pay up for Wall Street’s recklessness. And the Federal Reserve stepped in to rescue them by buying $ trillions of these esoteric derivatives. Those remain on the books of the Federal Reserve to the tune of some $ trillions, yet.

The Bush administration didn’t want to be left holding the bag of a massive collapse that wiped out Wall Street, resulting in a repetition of 1929. The political repercussions for the Republican Party for that economic disaster lasted decades.

When Dibble’s 2nd U.S. Bank suffered the withdrawal of the Federal receipts, sound banking would demand that loans would be called in as well. This was seen as a deliberate ploy by his opponents to wreck the economy. Jackson, always a hard money man, released the Specie Circular of 1836 mandating Western land purchases be paid with gold. This could be seen as having had a chilling effect on the economy as well. The price of cotton plummeted, due to overexpansion led on by easy money now that the U.S. bank no longer was an effective central banking instrument. And land purchases, much of it for cotton production, plunged in 1837. The destruction of the Bank presaged the sharp downturn of 1837. And the public determined the “War on the Bank” precipitated the Panic. The voters turned out the Democrats and elected a Whig for President in 1840.


A huge problem attaining straightforward economic analysis is its varying narratives. The Jackson’s Bank War is not immune. Stephen Temin in his The Jacksonian Economy has posited a counter narrative. The inflation 1832-36 and the Panic 1837 transpired for reasons other than absence of U.S. Bank supervision. Reserve ratios held steady; that is the amount of funds retained versus deposit didn’t drop dramatically after Jackson removed deposits from the Bank. In fact the public was content to hold less specie and more paper at this time and that in itself could escalate prices.
British business investment in America and its demand for cotton in the period 1831-1836 accounted for the spurt of inflation in the economy. Another international factor contributed to inflation for the period, which was Chinese silver purchasing British marketed opium.

The downturn began when the Bank of England acted in 1836 to stem the American investment, fearing loss of specie, by raising their interest rates. There was a short respite in the downturn in 1838 America; then a bad wheat harvest in 1838 in England increased imports and higher Bank of England interest rates again in 1839. The higher interest rates will attract funds and are meant to retain them in England. This is to counteract the increased grain imports, due to bad harvests in Britain. This had a negative effect in 1840 in America, due to the loss of British investment.

The crux, Jackson’s Bank War had little to do with neither the inflation nor the Panic of 1837. It was mentioned that the inflation was caused in part by the public’s holding MORE paper then specie as a percentage for the 1832-1836 period. Excessive cotton harvests and the accompanying collapse in its price and Bank of England’s contractive policies in 1836 instigated the Panic of 1837 NOT the Bank War. As noted the private banks were no more expansionary in their lending practices than the U.S. Bank either. 

The take away here is that President Jackson, Libertarian who envisioned little governmental role in the economy, saw a monetary system regulated by a Central Bank as an undo accretion of power; contrary to Constitutional ideals. He retained an agrarian sensibility that was skeptical of fractional reserve banking (the “It’s a Wonderful Life” bank) that had become common place. His Specie Circular of 1836 enforced this idea that real money, real store of value, was gold or silver not artificial contrivances like bank notes and paper, thus specie could only be accepted for Federal land purchases. Surprisingly, his Kitchen Cabinet was largely composed of ambitious business types not agrarian idealists. State banking versus The U.S. Bank was very attractive to them. And so they were much in favor of the destruction of the U.S. Bank.

Thursday, February 28, 2019

Hamilton and His Bank

The visionary Founding Father, Alexander Hamilton (1757-1804), was a highly controversial figure in his day. Although from quite low origins in the Leeward Islands of the Caribbean, he was sponsored to be sent to attend King’s College (now Columbia) in New York. He got caught up in the political fervor of Revolutionary War and in 1776 he joined to fight, then shortly organized a 60 man Artillery Company of whom he was elected captain. They participated in the battles of White Plains and Trenton and in 1777 at the Battle of Princeton. He was recommended to George Washington and served him as his closest Aide to Camp, as Lieutenant General for four years until he insisted on the chance to lead his own troops. He participated in the decisive battle of Yorktown in 1781 that saw the surrender of the British and the eventual end of the Revolutionary War.

He served in the Continental Congress and as an Assemblyman in the New York legislature prior to Constitutional government. In 1784 he established the Bank of New York along with Aaron Burr, his eventual killer in a duel in 1804; that bank continues today as New York Mellon Bank (BNY Mellon). He served as delegate to the Constitutional Convention, as well as writing the majority of the Federalist papers along with Madison that championed its ratification.

In 1791 he was appointed Secretary of Treasury in Washington’s administration under the new Constitution. He was an advocate of what would later be termed the American System, most closely associated to Senator Henry Clay (John Quincy Adams and Abraham Lincoln, as well).  The platform of the American System included protective tariffs, national bank and internal improvements. His “Report on Manufactures” to Congress in 1791 recommended active measures to promote business ventures along with a protective tariff, a nationalist economic program.  

He pressed for an America that was meant to assimilate the business elites into its governance. Their participation was essential to good government. The Bank would be the vehicle to do this for one by holding the deposits of the U.S. Treasury. As such he advanced high tariffs to promote American industry and actually the Whiskey Tax to pay for the military to fight western Indian Wars (1791-1795).

For many, including the Federalist, there was great distrust of direct democracy that can easily descend into mob rule and disorder. Our Constitution is designed for government NOT to work well, since it is thought a government that governs least governs best. It’s divided into three branches; the legislative branch bifurcated into Senate, originally meant to be elected by state legislatures and the House. And virtually from the beginning the Judiciary, designed to check the other two branches, was filled by Federalists, appointed by President Adams, the party most suspicious of governing competence of the common man.

Agrarian America opposed the idea of Hamilton’s schemes. Part of the controversy was fact that a Federal bank was not part of the enumerated powers (Article 1, Section 8) set forth in the Constitution. From the beginning of the Republic there was debate over the idea these Enumerated Powers and the concluding section called the Necessary and Proper clause:

 “To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers, and all other Powers vested by this Constitution in the Government of the United States, or in any Department or Officer thereof.”

The debate continues to this day between the Constitution as a Living Document as opposed to one interpreted towards the Original Intentions of the Founders.

Agrarians had little use for these suspect artifices called banks. Banks were devices which “covetous” persons enriched themselves at the expense of the honest and diligent. Many efforts were made to ban banking completely. Governor of Kentucky in 1819 proposed a Constitutional ban on banking. Texas in 1845 prohibited banking absolutely. Iowa and Arkansas in 1846 prohibited the same. Free banking had led to abuses with suspect bank notes and many farmers left stuck with worthless bank paper.
An idea that echoes today’s Libertarians can be heard in William Gouge’s thoughts, “The business of lending [printing] money is no part of the duty of any government, either Federal or State.” And several periods in American history there was no Central bank with government currency. The policy of a national currency has great advantages but as has been seen in our recent history to harbor terrible risks.

There were many still, who saw state charted banks as a boon with its circulating paper. Many state banks had been chartered in the first decades of the Republic. Upon the closing of the First U.S. Bank in 1811 these state banks began to accelerate bank note lending, lacking the restraint provided by the Federal Bank. The amount of the bank notes rose from $28 million to $68 million between 1811 and 1816. It must be noted this is during the War 1812 where war time demands always strain the resources economies. That reckless interim prompted Congress to charter the Second U.S. Bank in 1816. As a depository of the U.S. Treasury it would accept specie, Fed bank notes and state bank notes redeemable on demand as payment of taxes. A significant segment of polity opposed the bank and the debate would arise again in 1832 for re-charter. President Jackson was incontrovertibly opposed to the U.S. Bank and vetoed the re-charter. The bank would cease to be a depository of the U.S. Treasury in 1833.

Hamilton, a Federalist, saw the bank as essential to the new Nation. The monied elites would have a stake in the new Republic. For that matter the majority of the delegates of the Constitutional Convention held debt, deeply discounted, of the revolutionary States of the Confederation. The prevailing wisdom held that these debts incurred during the Revolutionary War would never be honored. Hamilton and many others, representing business and mercantile interests, who were promoting the new Constitution desired to see these redeemed in full. Madison only wanted the original holders to be reimbursed in full, the speculators only partially.   Hamilton and his party would see that they would be repaid in full. This helped to create a foundation for promoting business interests; America would become a patron of the Industrial Revolution. 
Agrarian interests were very skeptical of what would become the standard financial lexicon of the Industrial Revolution.  The change Hamilton was pushing was an economy of obligations, contracts, negotiable instruments and other invisible artifices as opposed to the agrarian idea of direct exchange with money for a good between two honest men without these artifices. Corporations were held to be suspect associations of men that allowed them to act immorally; that is act in a way they wouldn’t individually. First Bank of U.S. was one of these artificial corporations.

We live in Hamilton’s America not Jefferson’s. Under his purview he set up the contentious U.S. Bank (also known as the First Bank of the United States) in 1791 situated in Philadelphia with several branches throughout the country shortly thereafter (Boston, New York, Baltimore, Charleston, Washington, Savannah and New Orleans). The bank was capitalized with $10,000,000. This bank imitated the Bank of England’s partnership of moneyed interests and the crown’s interest. The U.S. government was to contribute $2 million to the bank. This was done by sleight of hand. Government commissioners sold $2 million government securities in Amsterdam then deposited the drafts into the First Bank of the United States as the government capital contribution. Then the U.S. Treasury borrowed $2 million from the U.S. Bank to take up the $ 2 million in drafts, so a large claim of specie wouldn’t be presented to the fledgling bank. The reminder of the $8,000,000 was contributed by private interests of the country. $ 2 million in specie was to have backed the bank, but in fact no more than $400,000 was collected. Later this amount was to grow but the reality was the bank was lacking specie to back the bank. All to the good since the bank was run properly and no run was made on the bank.

This was a Fractional Reserve bank, established with a fraction of total deposits backed by specie. In this case ideally at 4 to 1, deposit to specie ratio, it was similar to the Bank of England.  Fractional Reserve Banking became the dominant type of banking in the industrial world. The TBFT (Too Big to Fail) banks like Citibank, JpMorganChase or Wells Fargo currently have capital ratios higher than 10 to 1. That is only $1 backing $10. These fractional reserve banks are subject to collapse. Thus Big Government with the complicity of duped taxpayers is called on to bail them out from time to time to prevent economic chaos. Despite the fact that they could have bailed themselves out as they had done prior to the Federal Reserve Bank was established in 1913. The biggest disaster related to this fractional reserve banking was the Great Depreciation, in which the banking system collapsed like an accordion.  Federal Reserve Bank, established in 1913 to allay these disasters, stood on the sidelines. There were thousands of bank failures; Iowa had 1200 alone in the 1930’s.   

Banking, fractional reserve banking that is, began with an immoral scam. Once banks fulfilled the purpose of a safe storage and prevention from loss for your valuables, gold, silver or jewels; then banks provided the convenience of a bank note that represented your value in safe keeping.  That was so much easier than carrying that bar of gold around and safer too. But then banks realized particular customers hadn’t bothered to redeem their bank note for specie for a lengthy period. An unscrupulous banker hatched the idea to lend at discount the same specie. Another bank note is originated on the same store of specie and bank makes more profit. The bank note is used to pay someone else, with the assumption that it’s redeemable in specie. If ever those two show up at the same time…oops! Let me get back to you about that gold, says the banker… It’s around here somewhere, I think. The Founding Fathers realized this too:

“Every dollar of a bank bill [note] that is issued beyond the quantity of gold and silver in the vaults represents nothing and is therefore a cheat upon somebody,” John Adams, 2nd President of U.S., said in 1809. This view might be one reason he and Thomas Jefferson had a dim view of Hamilton and his fractional reserve bank.

Later in the 1830’s John Quincy Adams identified suspension of redemption by banks with counterfeiting (the “let me look for your gold, I know, it’s right around here somewhere” response).

Banks were disinclined to promote redemption of paper to specie. It was far easier to loan a bank note and then postpone redemption to specie. In a classic case of the golden rule where the gold makes the rules, banking law came to accommodate this chicanery.  In fact before the American Civil War state legislatures began to see the benefit of banks delaying or even refusing to redeem its bank notes in specie. Specie, gold and silver, which had always been considered real money, was always in short supply. Ordinarily paper money possessed value only when it had the prospect of being redeemed by gold or silver. But more often than not the bank had issued far more bank notes than actual specie on hand. Honest redemption, paper for specie, will cause the accordion to collapse, the banks would caution.

Paper money, as many advantages as it possesses, can be frightfully abused. Bank notes can indeed be passed hither and yon. And in fact fractional banks (paper money backed by a fraction of specie) can create money. The bank would loan a sum represented by a bank note (or bank check) and this note  could be re-deposited or deposited to another bank or given to someone else as payment. In 19th century America that discounted check might not even be presented back to the originating bank. Nice for the bank, which would earn interest on the loan and never have to face redemption. Better than counterfeiting. As a result unregulated banking led to massive expansive of bank notes and acted as currency. One egregious example back at the beginning of banking, in March 1808 The Farmers Exchange Bank of Gloucester, Rhode Island had $22,514 bank notes circulating with promise of redemption in gold or silver and $380.50 of specie on hand. Unscrupulous bankers might have more than one bank in which they would write bank notes on the other. Nothing more than sophisticated kiting.

At the foundation, banks were expected to stand ready to redeem the bank note for specie, generally gold. Many times they failed to do so.

Incidentally, Revolutionary War state governments had shamelessly abused the issue of bills of credit. Since there was little to finance the Revolutionary War, states began to issue I.O.Us or bills of credit, actually a Fiat Currency. The abuse led the Constitution to prohibit States issuance of Bills of Credit (Article 1, Section 10). And many thought banks charted by the states and issuing bank notes were virtually the same mechanism prohibited by the Constitution; people preferred the circulation of paper, however.

If you didn’t know, the Union Government in the Civil War did much the same with its Greenbacks. Of course Confederate money once again a fiat currency was far worse and was known to be worth little more than paper, even before they lost the war. 

The First Bank of U.S. was America’s first central bank and acted to regulate the currency. This in itself caused hostility from the public. The bank insisted on redemption of specie from bank notes written on state banks and transferred gold balances to the bank in Philadelphia. The criticism of the South and the West was that it drained gold from the branches to pay to demands on the Eastern banks. America exported agricultural products, much of it cotton. The South produced the bulk of the exports that the North borrowed on. And thus the South paid for the imports. And so it was thought that it was the North’s buyers and bankers that took the South’s profit, adding insult with North’s advocacy of the tariff. Nonetheless, without the gold that the Federal bank transferred from South and West to the East imports would have largely ceased.

I conclude by re-emphasizing that Hamilton, so accomplished and visionary, prompted an idea of a Central Bank remarkably controversial for the predominately agrarian society. It regulated banking by insisting redemption of specie from the state banks’ notes, something hated by the banking sector in general. It rankled Southern and Western regions by transferring gold balances from branches to the central bank in Philadelphia. The bank only dealt with state banks ready to redeem their bank notes in currency, a restraining policy on private banks that profited by floating its bank notes. Absent a bank, farmers with good reputation could often obtain credit from monied individuals within the community; this is how credit demands were fulfilled in the agrarian society without banks.  Admittedly, this would undoubtedly make it far harder for less established agrarians to obtain credit.

Hamilton’s vision was for a prosperous, industrializing America guided by business elites. His vision would be mostly realized. Jefferson’s Republic of yeoman farmers not at all, but his ideas live on in Conservative and especially Libertarian thinking. 

Thursday, February 7, 2019

Panic of 2008 Explained

The 2008 Panic is little understood. We know there was evidence of a sharp downtown. Real estate prices plunged. The stock market collapsed. Investment banking firms on Wall Street failed. Large automobile manufacturers were in peril. Where did the Panic arise? Was there good reason for the financial sector to Panic?

The real Panic occurred in a dimly known and complex, unregulated financial sector, now known as Shadow Banking. Shadow Banking was populated by derivative securities whose value was derived from other sources, much of which was from residential real estate mortgages. 

In fall of 2008 we were informed that the gears of the financial world had locked up. Without immediate intervention a cataclysmic financial event was about to transpire. Absent massive governmental intervention we’d re-live the financial collapse of the Great Depression of the 1930’s. A frenzied colossal demand on the public treasury is made by the Bush administration. Was this just a play to fleece the taxpayers by Wall Street banksters?  

There were many factors contributing to the crisis.  One element was stated governmental policy under the Community Reinvestment Act to increase the number and percentage of citizens, especially minorities, owning a home. A large part of the problem originated when Banks had begun offloading their mortgage loans to Structured Investment Vehicles (SIV). In mid-2007 there were 36 of these non-bank financial institutions, usually situated off shore, totaling $400 billion in assets that gathered large groups of mortgages then spun off derivative securities backed by these mortgages, often subprime mortgages.

The commercial banks (ones that most people maintain their checking and savings accounts) needn’t be so careful about their borrowers, now. Banks would originate mortgages, bundle them then ship them to the SIVs which put them into tranches from prime to sub-prime. They would create residential mortgage backed securities (RBMS). These were acquired by Wall Street investment bankers like Morgan Stanley, Goldman Sachs, Lehman Brothers, Bear Stearns, etc. The last two of these went down in flames in 2008. The other two were secretly supported by the Federal Reserve with unlimited access to the Federal Reserve’s funds in 2009 to keep them afloat; the support amounted to $ trillions in short term borrowings at zero interest.

Housing prices that had seemed set to rise forever surprisingly began to decline. Housing never goes down, right? The first indication for me was the real estate for-sale signs that proudly read, “New Price”. Very interesting to announce a new price; it literally doesn’t tell you much. Is that a lower price or higher price that’s being announced? This forces you to guess that it’s probably a lower price, but makes you wonder why they are being so cute about it. Housing prices went as low as $90, $45 or even $20 thousand (that one was next door) in my community. Who knew? Not many. Maybe the mortgage lenders at the banks originating the lousy sub-prime loans knew, but they didn’t really.* Housing never goes down, right?

Part of the real estate mortgage bubble were teaser loans, no down payment, no principal payments, low interest ARM (adjustable rate mortgage) with balloon payment in 3 years which planned to show equity by the time refinance was due, as house prices continue to rise…oops! Housing prices stopped rising in 2007. People were faced with much higher payments after the initial enticing (ARM) mortgages expired and the need to refinance arrived. They couldn’t even sell the house for the amount of the mortgage, likely to be nearly, if not all of the original amount of the house value, now reduced. How did this torpedo the Wall Street Investment Bankers, the Fanny Mae and Freddie Mac mortgagors, and AIG Insurance?

These investment bankers were the casino gamblers of investment world. In the past Wall Street bankers lived off of fees for underwriting IPO’s (Initial Public [stock] Offerings) or issuance of stock or corporate bonds. They obtained fees for arranging mergers and acquisitions, as well. They did well.

Then the Smartest Guys in the Room (investment bankers) started buying asset backed securities (ABS) and Residential Mortgage Backed Securities (RMBS) using them as collateral and letting large corporate depositors say $500 million to stash money overnight. The RMBS is used as collateral for the party that deposits the cash. The investment bank pays a rate of interest on the cash that is less than the rate earned on ABS. These exchanges are called repos. The investment bank holding the ABS gives the Corporation the ABS as collateral, and the investment bank takes corporate cash, as a deposit. The investment bank makes additional profits when loaning out the cash in short terms loans.
The size of these exchanges is guessed to have been as big as or bigger than the commercial banking sector. In the $ trillions. This was the unregulated Shadow Banking world that the regulators Federal Reserve and FDIC were oblivious to.

All of this business by the investment banks is highly leveraged 20 to 30 times. So the money that’s really backing all this gambling is a fraction of the amount that’s being invested. It’s something like your standard two income family making something like $100k annual income together, deciding to borrow to buy a $3 million dollar home. No danger there? Somebody loses job or gets ill or divorce or any interruption in income will see them losing their house. And so, a hiccup and Wall Street banksters went into the crapper.  

On April 2, 2006, New Century Financial Corporation, a sub-prime mortgage originator files for bankruptcy and becomes a sign things are not all well in the mortgage sector. Many other indications of a downturn in the housing market begin to make themselves known to investors and the market suddenly came to realization that the collateral (these RMBS and ABS) that the Wall Street banksters possess may not be as safe as advertised. By the way, the Federal Reserve Bank wasn’t even looking at the housing market prior to the Panic.

Before the Panic, the investment bank’s collateral, the derivative security, was taken at face value; a $1,000 security would be sufficient collateral for $1,000 in cash. Then as in a run on commercial banks in the past, the investors began to demand more collateral for the same amount of cash deposited. And the crazy part of the panic, the investor began to demand the extra collateral for ALL securities, safe or suspect. Since these securities were so complex, nobody really understood them. Investors began to question them all, even the quality tranches. This is typical of a bank run. All banks suffer the run since the depositor knows nothing of the current financial health of their bank, even a sound one. It’s not just the bank in trouble that faces the panic; they all suffer a run. This is where the financial sector began to freeze up.

Wall Street Banksters were so leveraged they didn’t have the cushion to sustain the shock of a run. Bear Stearns was the first to topple in March 2008. It was bought by Morgan Stanley, which kicked in $1 billion along with a $29 billion loan from the Fed Reserve. Morgan Stanley bought them at $2 a share. Shares had been quoted at $172   January 2007.

What’s more, realizing in part just how risky these derivative securities were, the parties to these transactions thought they covered themselves by purchasing Credit Default Swaps. AIG offered these by the hundreds of $ billions. Investment bankers would find out later just how worthless they were. 

Then this same type of run was made on Lehman Brothers and there was no one to catch it. With their collapse the inter-bank transactions with these repo arrangements froze. That was onset of the Panic. Bush administration and the Federal Reserve were running around like their hair was on fire, not really understanding the cause. But doing everything they could to provide liquidity to the banking system.

The Great Depression in contrast saw the Federal Reserve stand on the sidelines as banks failed by the thousands, a key one was New York Bank of the United States. This saw the collapse of the money supply and financial disaster.

A case where complete collapse was averted was the Panic of 1907, taking place prior to the Federal Reserve Bank being established in 1913. The establishment of the Federal Reserve Bank was setup to prevent these panics. We’ll see shortly how well they performed.

The 1907 Panic saw a sharp downturn in the stock market of nearly 25%, several banks failed and others encountered runs. This is the situation where ALL financial institutions, solvent or no, became suspect and were subject to panicked withdrawals by depositors. Fortunately, the banker J. P. Morgan intervened to summon assistance from other bankers and provide liquidity in the financial system. Something the Federal Reserve failed to provide some 20 years later, whose failure led to the Great Depression. The voting public didn’t want the financial elites like J. P. Morgan bailing out the economy so the Federal Reserve Bank was instituted in 1913. Of course they failed miserably in 1930s to stem systematic bank failure.

The same cooperative assistance between Wall Street bankers could have been contemplated in 2008 but Wall Street knows they have the taxpayers and Federal Reserve to pull their chestnuts out of the fire. The elite 1% are far more clever about pillaging the public treasury than the public. The arcane financial instruments that Wall Street investment bankers had devised backfired on them and the Goldman Sachs bankers within the Presidential administrations knew when their cohorts in Wall Street were in need of relief.
As stated previously, a significant portion of the 2008 Financial Crisis can be laid on the stated governmental policy by the Community Reinvestment Act to address the lack of minority homeownership. There were presumed racial biases keeping minorities from getting a leg up into owning their own home. The government begins to promote mortgage loans to lower income earners and minorities. Lending standards were degraded. But the commercial banks offload these mortgages to the SIV, as earlier stated. These mortgages are grouped and sold in tranches with assigned risk ratings. The more risky loans with blemishes like recent late pays or low credit ratings or high loan to value ratios or even bankruptcy are placed in the lowest rated tranches.

Part of the financial slump Freddie Mac and Fannie Mae, the giant residential mortage GSOs, that accepted much of this trash, with their tiny to nonexistent capital balances, doomed them to go under. In 2008 they held an estimated $2 trillion sub-prime loans (what a euphemism! Really risky or suspect is more accurate characterization). For example nine years after their massive bailout the 2017 Freddie Mac financial statements showed a negative ($312) million in equity. They were bailed out to the tune of $300 billion, one source reports. It’s certainly not beyond the realm of imagination with their nonexistent capital balances, the US taxpayer will bail them out again sometime in the future.
The “smartest guys in the room” thought safeguarded themselves from risk by insuring themselves with Credit Default Swaps: Insurance against failure for these risky RMBS and ABS items. Under CEO Martin Sullivan’s guidance AIG (American International Group) issued $ hundreds of billions of these CDS guarantees, never figuring they would have to pay. They were right they didn’t; U.S. tax payers did with $180 billion in bailout money. We’re told they it has been paid back some years later…small consolation.

As an aside to give a picture the size of $180 billion, it’s sufficient to construct a hundred auto plants or skyscrapers. All to the insurance industry. And $300 billion to Fannie Mae and Freddie Mac, who bought $ billions of these sub-prime loans, to the mortgage finance industry. The level of the malfeasance of the finance and investment sectors was astounding!                                                                                                                                                                                                                                            ***
The 2008 panic was accompanied by a great deal of hysteria, especially by the Bush administration, which along with the Federal Reserve was largely clueless themselves. The Bush administration was throwing money around by the hundreds of billions, $700 billion in the TARP (Troubled Asset Relief Program). This was an unfocused program that spread money around to financial institutions including $10 billion each to investment bankers Goldman Sachs and Morgan Stanley. In actuality they found use to expend $431 billion of the appropriated $700.

The Federal Reserve was completely oblivious of the workings of this massive Shadow banking market prior to the 2008 Panic, with its bundled mortgages and corporate paper in SIV’s and repo exchanges. No accurate estimate can be made of the size of this Shadow banking sector was; some estimate it was as large as the known, regulated banking sector itself. For that matter they remained ignorant of the impending collapse in the overinflated housing market.

The Federal Reserve began a nearly decade’s long Zero Interest Policy, by setting its loans at 0.0% in attempts to put liquidity into the banking sector. This included a massive purchase of $ trillions of these suspect RMBS. Even now in 2019 the Fed’s balance sheet is bloated with $3.7 trillion of bonds and RMBS. This was a unheard of policy whose consequences have yet to been determined. So far steady but not spectacular economic growth for past 10 years.

The crux of the Panic was the unexpected decline in the residential real estate mortgage sector; panicky corporate depositors demanded more collateral as question was raised about the safety of the derivative securities like RMBS used for collateral by the Wall Street investment bankers. This is quite similar to a run on a commercial bank and highly leveraged investment bankers couldn’t ante up. The huge Shadow banking sector had frozen up; the fallout from that would be unknown. No one wanted to repeat the Great Depression. The Bush ($700 billion appropriated) and the Obama administrations ($800 billion) spread money about with abandon in hopes the collapse would be stayed.  

The Panic of 2008 differed fundamentally from the Great Depression that originally saw the Crash of the Stock Market in 1929. The Great Depression eventually saw the collapse of the commercial banking system that led to widespread bank failures in the thousands (9,000 approx.). The Federal Reserve, newly established in 1913, making a monumental miscalculation, neglected to stymie the increasing cascade of bank failures. In 2008 the numbers of commercial banks actually failing were few; runs on these commercial banks were nonexistent, as a result of deposit insurance.

*There was an isolated voice in WaMu (largest savings bank at the time), warning of a housing bubble. He was ignored. The company, guilty of purveying suspect residential mortgages, many with little or no documentation, tanked in September 2008, subject to massive runs and  rejection of their mortgages for securitization. But he was only one of the few. Such luminaries as Warren Buffet, Alan Greenspan and Ben Bernanke failed to see the impact of a declining housing market.