The Bailout: A Far Cry from Socialism

"Socialism!" That's the alarm many conservative commentators and legislators are sounding about the latest development in Washington's bank bailout scheme. Critics worry that the latest bank rescue plan will begin a slippery slope towards socialism or at least a day when government officials run American businesses, the American economy and, eventually, American lives.

But this isn't the first time the U.S. government has held stock in banks, and the nation never turned to socialism. Unless the government's investment in banks comes with effective government oversight, the real problem is that banks will continue to have too much autonomy rather than too little.

As part of the federal government's financial bailout plan outlined over the past few days, President Bush and Treasury Secretary Henry Paulson joined an international effort to help troubled banks by buying stock in them. Their hope is that the government's investment will get the banks to lend more money. It would also assure bankers that the loans they give each other are safe (banks actually lend each other money on a regular basis). Then money will start flowing again between banks and to businesses that right now can't get the credit they routinely depend upon. If the plan succeeds, when the economy finally improves and the stock market goes back up, the government could sell its bank stock and probably make a profit for taxpayers.

Despite some concern about the United States becoming socialist, partial government ownership of corporations, especially banks, dates back to the beginning of the nation. When the government did own a piece of banks, businessmen elected by bank shareholders -- not government officials -- sang the tune, much to the dismay of the legislators and their constituents who warned that banks had too little public oversight.

Many of America's first banks were owned partly by either state governments or the national government. These included the first Bank of the United States, established in 1791, in which the federal government held 20 percent of all shares. Among the states, Pennsylvania in particular owned stock in numerous banks, beginning in 1793 with a third of the Bank of Pennsylvania. How much of a stake our current government will buy in individual banks remains to be seen, but it will probably not be more than a quarter of any given bank.

Businessmen ran banks in the early republic as they saw fit regardless of how much stock governments held. Usually, when a government owned a chunk of a bank, it was allowed to appoint a few men to the bank's board of directors. But government-appointed directors were always a small minority. They got outvoted or ignored; one writer and former bank director, appalled at how little influence government-appointed directors held, sneeringly referred to them as "men of straw."

People wary of bankers' motives complained that banks operated solely for the interest of the private board directors, despite the broader economic consequences of their actions. It didn't sound much different from today's complaints about investment bankers raking in millions while families getting foreclosed out of their homes and taxpayers pick up the tab for bank losses.

Those early bank critics had reason to be concerned. Our current financial crisis is largely caused by too many bad housing loans made possible by recent relaxation of government oversight of financial institutions. In the 1810s and again in the early 1830s, despite the protests of state directors, many state banks made far more loans than was wise, too. In their reports to state legislators, they offered the barest of financial information -- certainly not enough to judge their financial stability. Both those times the bubble burst. We can only hope that our economy does not fall as far as it did during the Panic of 1819 or the Panic of 1837. When dozens of banks failed, these panics threw the country into economic depressions.

The new bailout plan will be administered according to the recently passed $700 billion federal bailout legislation. Although there are provisions against golden parachutes for banking executives, among other restrictions, it does nothing to rein in the kind of behavior that caused the financial crisis in the first place.

One thing remains the same: regardless of how much money the government invests, the bailout plan still allows bankers to be in charge of bank policies, for better or, as we have seen recently, for worse. It's not socialism that we're getting or socialism that we have to fear, but unregulated capitalism. Capitalism got us into this mess, and we are counting on government-backed capitalism to get us out of it.

This piece was distributed for non-exclusive use by the History News Service, an informal syndicate of professional historians who seek to improve the public's understanding of current events by setting these events in their historical contexts. The article may be republished as long as both the author and the History News Service are clearly credited.