May 11, 2020
We all know about government bailouts.
They’ve been around for a while. But did you know that the government was once bailed out by Wall Street?
Dollars used to represent actual gold in the treasury—what we call the “gold standard”. Dollars had value because they could be traded in for gold. But here’s the catch; the US didn’t have gold to match every dollar floating around the economy. If everyone suddenly decided to trade in their dollars for gold, the government would eventually run out and have to start turning people away. Faith in the US economy would collapse.
This nightmare situation was called a gold run, and it was pretty common in the 19th century. But the Panic of 1893 was especially bad. European investors, startled by collapsing investments in South America, started what became a huge gold run on the U.S. Treasury, pulling out millions of dollars. People quickly started pulling their money out of banks, trying to secure as much of their cash as possible. The economy was in total meltdown.
J.P. Morgan Enters the Scene
Business mogul J.P. Morgan had enough powerful connections to realize that the U.S. Treasury was in deep trouble. Morgan wasn’t the wealthiest man in the world; his fortune of $120 million ($1.39 billion in 2020) was pocket change compared to the net worth of John D. Rockefeller, who would be worth about $340 billion today (1 & 2). But Morgan had influence and connections, and he was committed to bailing out the government.
However, there was a problem. Morgan and the gold standard were both unpopular. Grover Cleveland, president at the time, wasn’t excited about aligning himself with either to save the economy. Fortunately, Morgan had a trump card; he knew from inside sources that the government was almost literally within hours of defaulting. And he had done his research. An obscure statute from the Civil War allowed for the government to sell Morgan bonds while he gave them enough gold to avoid going broke. Cleveland knew he was picking his poison. He would either look like a Wall Street pawn or let his country go broke. But he eventually gave Morgan the bonds and accepted the gold.
It worked. The economy restabilized and the country was solvent. Cleveland lost his next election. Morgan continued to prosper. But the days of Wall Street bailouts were numbered. Business owners decided after a panic in 1913 that the government should be the one to fix economic downturns. And the Fed has been bailing out Wall Street ever since!