This is Democracy – Episode 280: Banking and Democracy

[00:00:00] Intro: This is Democracy. A podcast about the people of the United States. A podcast about citizenship. About engaging with politics and the world around you.

A podcast about educating yourself on today’s important issues.

And how to have a voice in what happens next.

[00:00:24] Jeremi: Welcome to our new episode of this is democracy.

Today, we are joined by a wonderful author and new friend, someone who is doing really interesting and extraordinary work not just on American foreign policy and American democracy, but also on banking on the role of domestic and international banking, the role of banking institutions, particularly the Federal Reserve, which gets a lot of news these days.

the role that these banks have played historically, particularly in the early 20th century in setting up and influencing the development of American power. an American democracy. our guest is Professor Mary Bridges. She is the author of Dollars and Dominion U. S. Bankers and the Making of a Superpower.

Mary, thank you for joining us today.

[00:01:18] Mary: Oh, I’m so honored to be here. Thanks, Jeremy.

[00:01:21] Jeremi: Mary is the, Ernest May Fellow in History and Policy at Harvard’s Belfer Center for Science and International Affairs. She’s a historian, as I said, of 20th century U. S. history. Her book, Dollars and Dominion, is hot off the presses and I encourage all of our listeners to, read it.

Mary is also at work on another research project on the role of infrastructure building and the role infrastructure building has played in American and foreign policy and domestic policy. she’s also written as a business reporter and an editor, and she has a, web page where you can see all of her work, or at least some of it.

You probably can’t, don’t have time to read all of it, but some of it, and her, website is marybridges. com. Before we get into our discussion of banking and democracy and American power, we, of course, have a scene setting poem from Mr. Zachary Suri. What’s the title of your poem today, Zachary?

Reserves. Reserves. Appropriate for banks, Okay, let’s hear it.

[00:02:24] Zachary: At night, some lie in bed and wonder where their money is and if it’s grown. They toss and turn with emerald eyes. They hope. They cheer. They groan. Others, they go digging in the dirt and bury their gold in shoebox safes, counting each scent that passes through.

They fill the earth with caves. But most of us, we spend our lives looking at the stars or crunching through the autumn leaves, not thinking that the sky might fall. We walk around with wallets that have seen their share of green, and credit cards that count their way to digits still obscene. But we do not stop to ask if all might just collapse.

Because money isn’t much if it’s not belief.

[00:03:11] Jeremi: I love the line, Zachary, credit cards to digits, quite obscene, I think you said, right? Is that the line?

[00:03:17] Zachary: Yes.

[00:03:18] Jeremi: Yeah, that’s, it makes me think of, what the credit card bill looks like after you and Natalie have spent a semester in school.

[00:03:26] Zachary: Yes, I guess so.

[00:03:29] Jeremi: What is your poem about?

[00:03:30] Zachary: My poem is about, how much of our economy depends on trust. And how much What we do in our daily lives depends on a belief and faith in, the value of the U. S. dollar, the security of our banks, the security of our financial system, etc.

[00:03:50] Jeremi: How we sometimes take that for granted until it’s a problem, right?

Mary, what drew you to write about this? it’s, a topic actually, as you point out in your book, appropriately, it’s a topic that many historians, neglect because it, it isn’t as, Sexy is writing, about, literature or writing about weapons. So what drew you to, to banking?

[00:04:16] Mary: Yeah, I, sometimes look up and think, Oh my God, where am I? How did I get here? And I love that. That scene setting poem was just, I love that you turned banking into poetry, Zachary. Terrific. so I am not someone who thinks that banking is necessarily a great starting point for, gripping narrative.

but I, I worked as a business reporter before grad school, and I guess the follow the money cliche really got, drilled into my brain. what I wanted to understand was how US companies got global. basically to understand how U. S. power took shape outside the State Department in different ways.

And, in the early nineteen hundreds that pretty much didn’t exist. There were a handful of U. S. companies operating overseas. But by mid century, we really have the foundations of U. S. multinationals as starting to become dominant players in global affairs. And so I wanted to understand that middle period of how we got there.

And, you follow the money, you’re going to get stuck with banking. and so the, One of the things I found really interesting was to look at this branch bank. it’s not, yeah, it’s not as exciting or like top dollar as, the jet setting bankers doing the big deals, but the idea of looking at the brick and mortar institutions, the, that are designed to have a long term staying presence.

Seemed to me a really useful entry point for understanding the kinds of power and economic relationships, and sustained contact that I wanted to understand.

[00:06:07] Jeremi: and this is the institution that is, in some ways, the predecessor to current Citibank, is that correct?

[00:06:14] Mary: Correct, And it takes a couple different forms, the city, National Citibank, acquires this protect this bank that I study in the early period.

so it wasn’t branded as a national city operation in the early period. but city acquires it, over the course of World War 1. and so these different kind of branching institutions get all woven together.

[00:06:39] Jeremi: And, you’ve partially answered this already, but why is this so important?

What does it tell us? Not just about banking and finance, but really, I think the larger point of your book. What does this story of this bank and the changes in banking institutions tell us about changes in American power and American democracy?

[00:06:58] Mary: So I think there are two dimensions of that. I think there’s the way that banking, I think this came out in the poem too.

it’s, it’s really, it’s part of the hardwiring that we take for granted until something goes wrong and when it’s working properly, we don’t realize sometimes how important it is to the circuitry of economic opportunity and it’s really wired into the way the government is. Our governments are still the duty to expand the money supply.

That depends on banks. And similarly, in terms of US power overseas, and there’s a, there’s an element of this, it’s just an infrastructural piece, Transcontinental railroads to get to consolidate the United States power over this continental space, banks are the circuitry that get dollars overseas and connect us businesses, in concrete ways to the world.

So there it. The way of looking at banking has this dimension of, of re centering this infrastructure as part of the operation of U. S. society and of how the United States is positioned in the world.

[00:08:13] Jeremi: Great. Zachary?

[00:08:15] Zachary: Why do you think it is that we pay so little attention to banking, at least in our politics, if not in our policy?

[00:08:22] Mary: it’s boring. It can be really boring. And I think that can be part of its power. let me tell you about this arcane credit instrument called the Banker’s Acceptance. If you want to clear a room at a cocktail party, start down that route. I’ve tried. So one, this is part of the story that I Realize I had to scrape out to tell to explain how US banks got global it’s this very complicated credit instrument, designed to facilitate global trade And it is the cornerstone credit instrument in a lot of ways of the early federal reserve system so When these instruments become extremely technical, the domain of people who likes to argue about them shrinks, and I think there’s a way in which it’s not necessarily a, nefarious conspiracy to, Strip people of power and, hide the stakes of the conversation, but it is convenient if, this, circuitry becomes increasingly technocratic and the domain of a small, set of, elites.

One of the things I really care about, in this book is to try to make Economic concepts, the day to day, material of banking more interesting and weirder and bring it back to the kind of granularity that people can really reclaim and talk about and understand the, the politics that are baked into it.

[00:09:58] Jeremi: Mary, I remember, I think it was a couple of years ago, maybe a year or two ago, reading the proposal for your book. we’re fortunate to have published your book in our series at, Princeton University Press on America and the World. And I remember being really stunned by the, writing you had then, and you have a wonderful longer description in the book of the banker’s acceptance, of this, form of credit that was created.

And, I was stunned that I had. didn’t really know anything about it, hadn’t even heard about it, and how important and actually fascinating it is. I don’t think it’s, boring. I think it’s just, something, it’s a little arcane for our basic knowledge of, politics and foreign policy.

So, maybe if you can walk us through it a little bit, cause I don’t actually think it’s boring. how did banks figure out how to pay people who were sending goods overseas and then how did they create a market of these instruments? That’s really what we’re talking about, right?

[00:10:54] Mary: Yeah, so there’s a little bit of eat your broccoli for a second about this, but I feel like I have to say sometimes to explain the bankers acceptance market, I found it hard to get myself back into the problems that credit instruments needed to solve in the early 20th century, and it helped me to understand the centrality of British banking and the London market.

in an era of. Seemingly instant digital transactions this these problems are hard to recreate but sending goods with a major leap of faith in a lot of ways. You put your stuff on a boat. It takes 3 months to get somewhere and you want payment and so you have to there’s a an element of foreign exchange.

There’s a trust. There’s intermediaries. There’s a movement of communications. There’s a lot of questions about how this gets done. And so banks. Create these credit instruments to fill those gaps and the British had a really good system down and as the United States wants to up its game internationally in the Early 1900s, the idea that U.

S. traders were constantly paying a tribute was some people’s term to British banks every time they wanted to trade something was increasingly galling and U. S. reformers in a lot of ways look to this British system to create a dollar denominated alternative to this, I, this model of bills on London.

and so that’s what the Banker’s Acceptance Market Was designed to do and obviously to get a banker’s acceptance. You got to have a bank. So the whole, the whole kind of bedrock of the system really depended on having the banks create these credit files, create connect traders. To each other and be intermediaries that would handle different parts of the kind of middle layers of all of these, all these transactions,

[00:13:10] Jeremi: right?

So as I get to

[00:13:11] Mary: your question,

[00:13:12] Jeremi: yeah, absolutely. And I was just going to clarify 1 point, as I understand it in your excellent explanation, this is the way in which banks guarantee someone that they will be paid for the cotton that they have sent to a. Another country, right? The bank is guaranteeing that and then you can trade in the bank guarantees from one entity to another.

Correct?

[00:13:36] Mary: Exactly. And so banks could get that payment promise off of their books and sell it to intermediaries who were able to deal in higher volumes. It’s very similar to. securitizing mortgages or something like that. yeah, it’s a, payment practice that, that banks developed in the early 20th century that in many ways presupposes some of the dynamics that we see today.

[00:14:02] Jeremi: So in your book, you really paint a very vivid description of how this world emerges, how the United States enters this world, which, as you said, was still dominated by great power. Britain dominated by the British pound sterling as the, default reserve currency of the world. The United States enters this.

And then there’s another watershed in your book, which is the creation of the Federal Reserve in 1913. Why is that so important?

[00:14:30] Mary: So there’s the low hanging fruit. The obvious way is the passage of the Federal Reserve Act changes the ground rules for us banks before the, 1913 act. Large banks who were really well equipped to operate overseas branches were not allowed to do so because of prohibitions in US banking practices that really wanted to limit the size of banks and the kind of consolidation of scary financial power.

so the Federal Reserve Act of 1913 changed those rules and that piece of the. Of the kind of historical picture was pretty well charted. what I found really interesting, as I was saying, was that the Federal Reserve system operated around bankers acceptances. the Federal Reserve Act not only allowed banks to trade in acceptances, U.

S. banks created, it created this, it authorized this market in dollar denominated acceptances. But also the Federal Reserve Banks itself start, they started buying acceptances to hold in their own portfolio. They were trying to nurture this market, to really help U. S. banks transition to an unfamiliar credit instrument.

And so particularly the Federal Reserve Bank of New York becomes the largest buyer of acceptances. So it’s not, the Fed all of a sudden is not just the architects of the ground rules, it’s a real, it’s a player in the game, and, a huge one, and I argue that it, it’s, this is not the case of Huge, crazy profit margins and big fortunes being made or lost.

It turns out the banker’s acceptance market is pretty ill futed to many of the demands of trade at the time. And it’s a cumbersome market. it’s not a great market, but its existence. Really changes the calculus for how U. S. Banks can operate overseas. And as some of the large banks are trying to get a foot in this market and see how it plays out all of a sudden, the opportunities of having an international presence become much more appealing.

[00:16:47] Zachary: It strikes me that this, development played a much more central role in the economic success of the United States in the 20th century than we often give it credit for. How central do you think, the development of this banking system was to American economic success in this period?

[00:17:05] Mary: A great question and I don’t, I, I don’t want to overplay my hand here that like, there are a lot of ways there.

There are several economic historians have written about the role of the Federal Reserve as opposed to US banks a big, Statistically as significant in, pushing the acceptance of the U. S. dollar is the dollar reserve currency. And I don’t mean to say that the United States wouldn’t have become an international powerhouse without if not for branch banks, But the bigger argument is what they’re doing on the ground shaped the ways in which U.

S. Power touches down with U. S. Trade interacts with different markets. So the infrastructure that exists becomes sturdier and more durable, as, for example, in World War I, demand for U. S. goods suddenly increases tremendously, and the, British banks cannot operate in the ways that they have in the past because of the context of war.

So it’s a, it’s a story of, shaping the how. More so than an argument necessarily about being necessary and sufficient for, this kind of economic power. So they they, work in tandem and, and interact with each other.

[00:18:30] Jeremi: I think this brings us to the question of democracy as well as economic power.

Growth and prosperity, right? there is a school of argument that the development of this banking system, what someone like Ellis Hawley called a corporatist system of cooperation between bankers, Federal Reserve officials, business leaders, especially big business leaders, that it actually diminishes American democracy because it empowers business leaders.

These elite figures to make decisions that have a very wide effect upon the average American’s life. is this an argument you agree with? And, I’m guessing you don’t fully agree with it. So how do you come back at that?

[00:19:14] Mary: So to me, I feel like that’s, That’s a compression that isn’t, or a reduction of the story that isn’t quite how, what I see playing out.

And what’s more striking is the way in which a financial design, can shift over time. So this banker’s acceptance market, very few people were in favor of it. Said, Oh, great. We can make international bankers richer. We can like that. That wasn’t part of the plan. Part of the reason bankers acceptances were a compelling credit instrument is because it looks like they are restricted to financing real trade.

They are not a speculative instrument. You can’t make a ton of money on them. They have to be tethered to this. Agreement between an exporter and an importer to exchange money and goods and so they, they look a particular way when the bankers acceptance market is created. So I don’t, it’s, it’s. a partnership, but who’s involved seems a little bit different at the outset, and then over time, basically, the market’s really complicated.

It’s a very small set of New York banks who turn out to be good at processing paper at that, with those margins, and at that high volume. And so the, market, Shifts and the players get restricted and that kind of reinforcement of the elite in charge at the top is part of the gradual trajectory of this infrastructure rather than its initial blueprint.

So I don’t, I think we pay a lot of attention to the blueprint and maybe less to the boring trajectory over time. And that to me, where a lot of the politics really take hold. And so for me, what’s at stake for democracy is really following how that infrastructure is.

[00:21:24] Jeremi: But, what about the theme that we hear commonly in, in a more recent, set of politics and historical analysis about the financialization of power in the United States?

That even if, as you say, and I think you show in your book, these bankers are certainly not out to subvert democracy. They are not anti democratic. They are, as you say, processing paper and trying to facilitate the flow of goods. nonetheless. they are developing mechanisms for profiting even on small margins, from a system that they’re creating and over time, American wealth will move from farmers and even factory owners to those who control more of the instruments invisibles, right?

is this part of that story?

[00:22:17] Mary: Yes, I think. so I think. One of the things I just wanted to add, like there are some U. S. bankers who, I think almost all of them would grant or try to say that they are upholding democracy in a different way, but on the ground, what that looks like can go a lot of different ways.

you, some of the U. S. bankers that I look at in the Philippines, they will say that they want to uphold democracy. But the way to do that is to prevent Filipinos from, acquiring, actual Office and ownership over their own country, even as the U. S. colonial officials themselves are trying to, to empower or at least give lip service to greater self government by Filipinos.

whoever the, claiming the mantle of promoting democracy in different context can look a lot of different ways. Overall, I think, yeah, the, kind of move towards increasing financialization. this is definitely a part of the story that I’m, telling, I think it’s interesting that a lot of Sometimes the process of financialization looks purely like a move to abstraction, and one of the things I try to highlight is the way in which, the patterns of, the social hierarchies and the personal relationships, and, the previous eras of, banking relationships are folded into this process of financialization, such that it’s not just a matter of, reading Credit files, those credit files came into being because of prior relationships that very often depended on these patterns of, social relations and elitism and, political contact.

[00:24:15] Jeremi: Right, and I, really liked that part of the book, and, you certainly hint in that direction, and, I guess, my, my question for today and, really what we’ve, already started to talk about, is, what do we learn for thinking about banking today? What are, in the aftermath of 2008, when we saw a near collapse of the banking system, really only saved by the Federal Reserve that begins in your book is in a sense, the hero of our recent period and perhaps a hero again, and maybe giving us a soft landing coming out of COVID and avoiding a recession, at least in the United States, perhaps, what are lessons for how we should be thinking about banking, especially from the perspective of many of us who are concerned about the future of our democracy?

How should we be thinking about banking today based on your in depth research and your reporting over the years on these issues?

[00:25:11] Mary: Oh, I wish I had a silver bullet policy takeaway. I, a lot of it Gives me a great deal of concern. particularly as we add, algorithms and, automation into the, foundations of how, the financial system works.

I think there’s a lot of reason to be concerned. And I, guess one thing that has been pretty striking about my, my, I, in many ways what I study can seem Like a, an arcane historical moment, and yet the key words that I look at are again, headline news, the politics of the Federal Reserve, credit practices, just the centralized institutions of payment systems and, clearing houses and those kinds of things.

I study this time period. That I look at in the early 1900s is about building financial systems that seem to me to be coming in question right now. And, the rise of FinTech, nationalization of payment systems, credit algorithms, all kinds of nanotrade actually. it seems to me that we, new technology and questions about, great power rivalry have put a lot of questions around institutions that really dominated 20th century economic growth and as we figure out how to reconfigure all of these pieces, I, think there is a big opportunity to put the system in sunlight to build, methods to, ensure accountability and transparency along the way, such that we don’t just focus on the original design of a financial system, but continually monitor the distributional stakes.

And I don’t know exactly what that looks like in terms of concrete Fed policies, but that to me seems like the takeaway is that. The more we cede that discussion to technocrats, the less clear it is, how it affects, basic participatory democracy.

[00:27:30] Jeremi: That the distribution of resources is at least as important as the efficient management of the system.

[00:27:36] Mary: Exactly. Exactly. And it’s something that we should ask all the time, rather than think about at the outset and then forget it once the hardwiring starts to work properly.

[00:27:46] Jeremi: That makes a lot of sense. Zachary, what do you think, as a young person who cares, of course, about democracy and about the distribution of power, but probably falls into what we all fall into in not paying enough attention to banking, how does this story, or does this story, help to think about democracy today?

[00:28:04] Zachary: I think it highlights the kinds of, maybe boring or, detail oriented policy that, that, that can play such a central role in preserving our democracy and how important it is, how important it is to, engage with those topics and to develop expertise in those areas to trust experts.

I think this just shows how complex, policy can be, but also how vital, serious policymaking is.

[00:28:33] Jeremi: Yes. Thanks. Yes, and as you said, how important expertise is, right? Yes. So, Mary, that, that’ll be our last question then, how did you develop the expertise to be able to do this, this writing?

you’re not a banker, as far as I know, and I think one of the barriers to entry for people who are interested in these issues, or at least recognize that they matter is that there is a great deal of technical knowledge involved. Your book has, graphs, not just narrative, right? so, how, should our listeners without having to become bankers themselves, how can they inform and prepare themselves to better at least follow and understand these issues?

[00:29:13] Mary: There are 2 things that were true to me. I, a mentor once told me that you have to become the historian that your sources demand. and I, I had been in grad school. I was hitting a lot of dead ends with research and I. I got this amazing set of files about the International Banking Corporation and knew nothing, had no clue what to do with all of these ledgers and thought, oh, gosh, I’ve got to get to be a banking historian and, and in doing so, no one, Now, very few people now know how to be a banking historian from 1907, and so I phoned a friend in a lot of context to ask what particular things meant, and, I worked as a fact checker for a little while and, developed a fearlessness to call anyone to ask for help and advice And, verification of information and, that instinct really served me well.

[00:30:13] Jeremi: So diving in and really, following the problem to, gain the knowledge you need to actually understand the problem is, what I’m hearing.

[00:30:22] Mary: Absolutely. And, yeah, don’t, in a lot of cases, I just needed, I needed to ask. I, checked my intuitions on things and when people said, yeah, that is weird.

Yeah. All right. That’s it. Yeah. I think that’s worth following. It was really validating.

[00:30:37] Jeremi: That’s wonderful. That’s wonderful. I, can attest having read, your book, it, I guess in two different forms or having read it twice, that it is definitely not boring. Your book, Mary, Dollars and Dominion, is a book I highly recommend to our listeners because it really provides a foundation for beginning to understand a lot of these issues that are historical but also, very contemporary and very significant, to where our society is today and where we go from here.

Mary Bridges, thank you so much for joining us today.

[00:31:09] Mary: Oh, thank you both so much. It’s been a, it’s been a pleasure. I really appreciate this opportunity. Thank you so much.

[00:31:15] Jeremi: Thank you. Zachary, thank you for your, thoughtful poem on reserves today. Thank you. And, thank you most of all to our loyal listeners and our loyal readers of our Substack.

we are grateful for you and we thank you for joining us for this episode. Of this is Democracy.

[00:31:36] Intro: This podcast is produced by the Liberal Arts ITS Development Studio and the College of Liberal Arts at the University of Texas at Austin. The music in this episode was written and recorded by Harris Kini.

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