Thursday, January 29, 2009

How NYC Became the World's Banking Capital

Banking and Politics

As Old As the Republic



3Many economists are now blaming the deregulation of the banking industry by congress as the cause of the nation’s economic crisis. It is important to understand that the intimate relationship between politics and banking policy is not new, nor is its economic influence now unique. Since the nation's beginnings banking regulations have been intimately connected to politics, and the politics of banking is a high stakes game not well understood by the public. It is clearly not understood by today's elected officials who have destroyed Wall Street and the economy of New York City. A review of New York's economic history and banking policy from 1784 to the Civil War clearly shows that banks and banking policy were central to the state's economic development (and closely entwined with politics). It also shows that intelligent banking policy can further economic development while bad policy inevitably causes economic havoc.

In New York City, the intimate relationship between banks and politics began when the Bank of New York was chartered in 1784. Founded by Alexander Hamilton, the bank was the only one in the City until 1799. Hamilton used the bank for his political ambitions as it furthered his Federalist Party and the conservative economic polices it espoused. Merchants who disagreed with Hamilton's political point of view ran the risk of having their loans called in at election time.
The Federalist chartering of the First Bank of the United States in 1791 had a profound effect on the economy. It also increased the influence of the wealthy in the politics of the 1790's. Just as important to NY was the chartering in 1799 of the Bank of Manhattan by Aaron Burr. It was the City's second major bank and a direct rival to the Bank of New York and its Federalist policies. The bank was chartered to bring water to the City, in an effort to reduce the perils of the Yellow Fever epidemics.

The Bank of Manhattan ultimately became instrumental in the rise of Tammany Hall as a political force and was also an important factor in the election of Thomas Jefferson in 1800. In fact, Jefferson's election had the effect of breaking the Federalist's control of New York's commercial, financial and political institutions. The number of banks rose from 28 in 1800 to 89 in 1811. By 1816 it was up to 250. Since the only currency other than gold and silver was bank notes, a banking charter literally meant having a license to print money. The circulation of more notes from newly chartered banks enlarged the monetary supply, creating capital for an expanding economy - all of which was important to the City's economic growth. The capital for building the Erie Canal came from New York City's banks. In fact, the largest initial purchaser of Erie Bonds was the Bank for Saving of New York institutions. The state completion of the canal in 1825 was the watershed event in New York's rise as the world's premier financial center.

Nationally, banking policy had an even more profound effect on politics and the country than it did at the state level. Hamilton's First National Bank was rechartered as the Second Bank of the U.S. in 1816 by President Madison on the grounds that it was the only hope for restoring U.S. currency after the War of 1812. Both the First and Second Banks of the U.S. were private banks, privately owned and had exclusive rights to federal deposits, and thusly functioned like the Federal Reserve - controlling the money supply and the flow of credit. The Second Bank continued to push both conservative policy and politics.

President Andrew Jackson like all traditional Jeffersonian Democrats, opposed large, centrally controlled financial institutions. Thus Jackson and his supporters charged that the Second Bank was a tool of the moneyed aristocracy and was intent on oppressing working people. Jackson's veto of the Second Bank's recharter became a major issue in the 1832 election. Support from the working classes including Tammany Hall helped lead Jackson to re-election. Jackson's veto of the recharter and the subsequent withdrawal of federal deposits had broad repercussions. One effect was to shift the financial center of the country from Philadelphia to New York, where it remains to this day. A second and more far-reaching effect was to cause the Bank of the United States to contract the nation's money supply, causing widespread economic panic and a depression.

In contrast to federal banking policy, New York's policy was much more far-sighted and intelligent. The Erie Canal was financially successful beyond its most enthusiastic bankers' wildest expectations. The $7 million borrowed to build the canal was quickly repaid and shrewdly deposited, unlocking banks with a view to furthering economic development across the state. Additionally, in 1839, New York set up the Safety Deposit Fund which all state banks were forced to join. The fund insured depositors against bank failures and fund officials had the right to review the solvency of New York's Banks. This was the forerunner of the Federal Deposit Insurance Corporation, and generally of state and federal banking regulations and legislation - the subject of today's controversy. These state regulations played a prominent role in the state's rise as the nation's financial center and in the prosperity this city has enjoyed until now.
The history has broad implications for the current debate over banking regulations and debate over nationalizing the nation's banking system. The large amounts of money at stake, combined with the high cost of modern political campaigns, must also raise questions about the potential influence of bank money in politics. Banking policy is much too important to be left in the hands of bankers and politicians - it must be understood and debated by the community as a whole.

Politics and Banking A WARNING TO SEN. DODD? "In 2003, Dodd secured two "VIP" mortgages from Countrywide CEO Angelo Mozilo that reportedly saved him a cool $75,000. This, while he was supposed to be overseeing the Fannie Mae- and Freddie Mac-backed subprime loans on which Countrywide made a killing." - NY Post ED The Bad Bank Rally - Should the U.S. nationalize failed banks and create a "bad bank" to take over their toxic assets? *** Bank Dumped Madoff Funds — but Didn't Tell Its Clients *** Glass-Steagall Act *** Bits of News - How the S&L Crisis is Repeating Today *** Open Secrets Money and Votes Aligned in Congress's Last Debate ... *** Other People's Money: Policy Change, Congress, And ... *** FBN Anchor: Treasury’s Misuse of TARP ‘Outrageous’; a ‘Mess ... *** Bankers Bailout: The Greatest Taxpayer Rip-Off in History (Nov. 26 ... ***The TARP Sinkhole at Emac’s Stock Watch Fox Business *** Wall Street's crisis could cost New York 225000 jobs - *** Wall Street bonuses are down 44 percent, which translates into $1 billion less in revenue for the state and $275 million less for the city. *** PM What Did JPMorgan Know? Company Pulled Out Of Madoff Funds Before Scandal *** An $800 Billion Mistake - Martin Feldstein, Washington Post *** Dimon: No bank nationalization talk.

Wall Street Mess Starbucks Closing 200 More US Stores *** American consumer can no longer act as engine of global economy... *** MADOFF: I'M WEAKENED AT BERNIE'S PARK AVE. 'PRISONER'S' FURY *** Queens Warehouse May Be Linked To Madoff Scheme *** Stash of Madoff papers found in Queens warehouse *** WALL STREET BONUSES DROP TO LOWEST IN 30 YEARS (Post) *** What Red Ink? Wall Street Paid Hefty Bonuses (Times) *** City takes hit as Wall St. bonuses cut *** Economix: Unemployment Rises in Every State *** Sony's Profit Off 95% in Q4 *** Experts: 2009 just like WWII *** Program gives homeowners borrowed time on mortgages *** Recession claims another fashion victim *** JetBlue 4Q crippled by bad investments.

City Hall POLL POTENT AMMO FOR MAYOR 'CLASS' WARFARE *** Backers of Mayoral School Control Face Resistance *** Klein Implores Legislators to Reduce Cuts to Schools *** Schools Chancellor: Education Layoffs Possible *** 15,000 school jobs may go: Klein *** Council to sic tix writers on idling parents *** Wall St. bonuses down, YOU get burned - painful hit to the city's tax coffers *** NY1 Exclusive Poll: NYers Still Sour Over Term Limits *** Mayor Bloomberg snatches top consultants from Democratic rivals - Democratic operative Hank Sheinkopf

City Council Wrongs: Daily News Ed - Way back in April 2007, Queens Councilman Tony Avella filed a pertinent bill. He had voted against, and refuses to accept, the 25% pay hike. He argues, correctly, that it is a conflict of interest for a sitting legislature to vote itself a raise as opposed to approving hikes only for members of subsequent sessions, as is done in Congress and Albany. Avella also wants to ban lulus, those extra cash rewards that the speaker doles out to loyal pals. Quinn's office says that Avella's bill needed work and that he wasn't responsive to their requests. Whatever. Avella has just filed new reform legislation covering the timing of pay raises. Will Quinn give the measure fair consideration? We'll count the days. " *** Editorials: Quinn's con game *** QUEENS IS KING IN 5-BOROUGH SURVEY: CITY'S HAPPIEST RESIDENTS LIVE THERE *** Communities, cops get tough on graffiti - and get results.

Judging NY's Court System Manhattan DA targets 'predator' Brooklyn lawyer - lawyer ripped off disabled people to the tune of $4 million, Morgenthau said it was "shocking" that court-appointed regulators never spotted the fraud.


MTA Melt Down The Post leads with angry public, the Times says the MTA wants to borrow more: MTA BOARD FARES BADLY AT HEARING (Post) *** M.T.A. Board Seeks Greater Influence in Borrowing (Times) *** News Ed: Credibility gap: MTA cannot afford any more ridiculous bungles - $530 million on the new South Ferry Station - and managed to make the platforms an inch narrower than they should be? *** The Goldilocks station *** Platform at new South Ferry station 1 inch too far from train.


City Hall Hospitals may close by the end of February *** Brooklyn park ridiculously expensive: $16M A YEAR FOR PLANNED B'KLYN PARK ***Two Trees Management has spent $400,385 on lobbying in 2007 and 2008, more than five times what the company spent in lobbying between 2002 and 2006 *** Protestors Accuse Council Member Of Blocking Housing Project.

Albany Now, ex-Sen. D'Amato is raising funds for AG Cuomo *** Gillibrand: Have problem, change position, hire operative ***Date Set For Gillibrand Summit With Latino Lawmakers *** Ravitch: How Caroline can best serve N.Y. *** Three Men in a Room: An idea whose time has stayed *** Siena: Paterson Losing Ground *** Sen. Kirsten Gillibrand conducted an interview in Mandarin with a Chinese-language newspaper *** KT McFarland (failed GOP US Senate candidate in 2006) wants the Republican Party to pick up the call for reform of Albany *** Voters Approve of Paterson's Senate Pick, But Not Paterson *** In Binghamton, Malcolm Smith insists state government has “a new vision and direction.” *** So much for the Sulzberger-Kennedy rumor.

Washington House Passes Stimulus; No Republicans Back It *** House approves $819B stimulus bill ***HOUSE GIVES BAM SOME $TIMULATION (Post) ***Stimulus Components Vary in Speed and Efficiency (Times) *** House Passes Stimulus Plan Despite G.O.P. Opposition (Times) *** Obama's stimulus bill: All-out effort to pry open your wallet *** Louis: GOP's stimulus stupidity, News *** GOP Stimulus Stonewall Spells Trouble for Prez *** GOPers balking as Biden plugs Bam econ plan *** Post Office Looking To End Saturday Mail *** DEAD LETTER DAY IS LOOMING POSTAL SERVICE LICKED BY $6B DEFICIT, LOOKS TO SLASH DELIVERIES *** USPS May Cut Out Full Day Of Mail Delivery *** Budget cuts may force dropped mail delivery day *** White House Unbuttons Formal Dress Code *** Obama is set to sign an equal pay bill into law *** Blago Will Give Own Closing Argument at Impeachment *** Blagojevich to End Boycott of His Own Trial *** Illinois Abuzz as Governor Makes His Case *** PM 'Buy American' Rider Sparks Trade Debate: Proviso Limits Steel, Iron From Abroad.

Media Mess Post Folds Book Review Section to Cut Costs *** Reader's Digest To Lay Off 300 *** NYT Results: Digital Down, and It's Getting Worse *** AOL Lays Off 700 *** Russia, China Blame US For Financial Crisis *** Times Shedding Profits, Red Sox.