The Bailout: A Far Cry from Socialism

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Mr. Schocket is the author of Founding Corporate Power in Early National Philadelphia (2007) and and a writer for the History News Service. He is an associate professor of history and American culture studies at Bowling Green State University in Ohio.

"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.

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Lawrence Brooks Hughes - 11/8/2008

The millions of bad mortgage loans which pitched the U.S. into its current credit crisis were not caused by a "relaxation of government oversight," as you put it. They were caused by the deliberate demand from the government that banks make bad loans, which might better be explained by calling them "affirmative action loans." For good measure, the Government put a de facto guarantee behind the bad paper via Fanny and Freddy. Lenders found this so profitable they were soon making loans of the same poor quality to many who were not poor and black, and who were buying very expensive houses. While it was Barney Frank and other Democrats who started the whole mess, it got much worse because some Republicans, including George W. Bush, were afraid of being charged with racism if they demanded the leniency be ended. I can well remember Bush's prideful claim of "greatly increasing black home ownership" during the 2004 campaign... It won't clear up soon under President Obama, either, since his far left philosophy insures a long delay before any confidence returns to private investors.

Arnold Shcherban - 11/5/2008

Many articles of the US Constitution have become obsolete decades ago.
It is abnormal and outright stupid for any nation to cling
to its Main Law written centures ago, ignoring the tremendous intra and extra societal and individual changes occurred since then.

Thomas Fitzgerald - 11/5/2008

I too think the bailout is unconstitutional, but so is a majority of the federal government. That being said, what the bailout really made clear is that our elected representatives do not represent us the people. Too bad we keep re-electing them.

Robert Lee Gaston - 11/4/2008

Not so much socialism as a huge waste of money. What are the banks using the money for? One, buying other banks. Two, feathering bonus pools. Some more members of congress must have gotten great home improvement loans.

Arnold Shcherban - 11/3/2008

Actually current bailout is a "socialism" and "redistribution of wealth" of a nation, though only in the up direction on the wealth scale.

Web Smith - 11/2/2008

There is nothing in the Constitution to prevent states from owning all of portions of banks. Since this power is not mentioned in the articles, the 10th Amendment prevents the federal government from owning all or portions of banks.

Regardless of the law that is being ignored, what was illegally voted on was a bank bailout or bank rescue bill. The idea that this has turned into financing healthy banks as they buy out failing banks' assets for pennies on the dollar smacks of fraud and should land some people in federal prison.

The government's state of denial that a Constitution exists has become psychopathic. They have run up a $12 trillion debt for things that they mostly are not supposed to be doing. They have allowed our military to be illegally used to transfer wealth. They have allowed our rights and liberties to be stripped. They have allowed an army of 12 million illegal aliens to invade the country and now want to give them amnesty. They have wrapped the hands of foreign oil around our throats. They have shipped our jobs offshore and given them away to cheap foreign workers. They grow bigger while saying that they want to grow smaller. They have raised our taxes while saying that they want to reduce them. They have caused the future of every child born in the world to become harder and more uncertain. They have protected bankers while they strip us of our wealth. They deny who they work for.