Planet Money - Summer School 4: Banker vs president and the birth of the dollar

Episode Date: July 31, 2024

Episodes each Wednesday through labor day. Find all the episodes from this season here. And past seasons here. And follow along on TikTok here for video Summer School. Planet Money Summer School has arrived at the birth of the United States and the chance to set up a whole new economy from scratch. Should there be a centralized bank? Should there be a single currency? We'll travel to two moments in the country's early history when the founders said "nope" to these questions and see what happened. First we'll witness one of the great economic battles in U.S. history – the president of the United States versus the president of the Bank of the United States – and see how the outcome ushered in an age of financial panics. Then we'll drop in on a time before the U.S. dollar existed as we know it, when you could buy things using one of about 8,000 forms of money circulating in the country. We watch as the Civil War leads to the first standard currency. Along the way, we'll learn why the cycle of economic booms and busts persists to today despite efforts to centralize America's economy throughout history. This episode was edited by Planet Money Executive Producer Alex Goldmark and fact-checked by Sofia Shchukina. Subscribe to Planet Money+ for sponsor-free episode listening in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Truth, independence, fairness, transparency, respect, excellence. This is NPR. This is Planet Money from NPR. Welcome back everyone to Planet Money Summer School, Economic History of the World. No dates to memorize, no long essays with footnotes, just the feeling of the temporal breeze in your hair as we drive the roadways of history with the top down. I'm Robert Smith, today is lesson four, the age of the panic! Could you hear the exclamation mark there?

Good. So far in summer school we have searched for the origins of money panic! Could you hear the exclamation mark there? Good. So far in summer school we have searched for the origins of money, watched the workers rise up, and witnessed the birth of the finance bro 400 years ago. But each and every time the story doesn't seem to end well. There are economic innovations, then people get greedy, and then the whole thing just collapses. On today's show the United States is born and says to the rest of the world, hold my beer. We are going to invent totally new ways to get rich and then subsequently crash and get poor again. Our professor today studies early American financial history, Sharon Murphy from Providence College. Hey, Sharon.

Hi, thanks for having me. Sharon, one of the interesting things about a new country like the United States is that it gets to invent its own economic system. There are a lot of decisions the founders have to make on things like banks and currencies. And at the very beginning, the US does not, for instance, create a single paper currency like we have today. What were they afraid of?

They had had some bad experiences during the colonial period with different colonies issuing paper money. And even during the revolution itself, when they issued so-called continentals as paper money to try to finance the war. And it resulted in a lot of inflation. And so they questioned the wisdom of this. And so in the Constitution, they focused on giving the federal government the right to coin money and regulate money, but not necessarily the power to create paper money or to establish corporations. Well, everything I know about American history, I learned from the musical Hamilton.

So I know that there was at least one man who was pushing for a big national bank, an economy that was all working together and centralized. But what was the argument against that? Who was trying to stop a centralized economy? Yeah, a lot of people feared having too much power concentrated in the hands of a small number of elites, especially when you consider the financial center of the United States was still in Philadelphia and not everybody was in Philadelphia.

Did Philadelphia have everybody's back? Did they have everybody's best interests in mind? So there was definitely concern about concentration. But it turns out if you try to have one country without one economic system, well, things go bad pretty quickly. So today we'll have two stories about the chaos of the early United States

and how the US eventually sort of fixed it. I know that you love this drama, Sharon. Well, it's fascinating to study people who are experimenting with these things and they're not quite sure what works and they're trying to piece it all together. So it's always interesting to see really smart people grappling with things they don't yet fully understand.

That should totally be the motto of Planet Money Summer School. Smart people grappling with things they don't yet fully understand. I'm gonna make the t-shirt. After the break, we will have ringside seats at one of the first big economic fights of the United States of America, the president versus the banker. Hey, it's Ayesha Roscoe from NPR's Up First podcast.

I'm one of thousands of NPR network voices coming to you from over 200 local newsrooms across the country. We bring all Americans closer together through free and independent journalism, music, politics, culture, and so much more. The NPR Network, what you hear changes everything. Learn more at npr.org slash network. One of the problems facing the early United States was that no one could agree on how centralized the government of this nation should be.

The states were all very different with very different economies. Should the president and Congress be able to tell them what to do, create a single set of rules for an economy? And so our two historical flashbacks today show us how the U.S. struggled for most of its history to get this balance right. One early thing the Founding Fathers tried was to create a national bank to help the government do business. They did the Bank of the United States and then they shut it down. And then they tried again in the early 1800s and that led to one of the great economic battles in US history, the politician versus

the banker, specifically the president of the United States versus the president of the bank of the United States. And the two men could not be more different. The president was Andrew Jackson. He grew up poor, an orphan, killed a man in a duel, and the banker was Nicholas Biddle. Rich kid, poet, and schemer. Jacob Goldstein and I did this episode back in 2017, and here's a little music so you don't notice how young I sounded back then. Right in the middle of the city of Philadelphia, and you can see it to this day, there is a

building that looks like the Parthenon. It's big, it's made of stone. There are so many columns. So many columns. So many columns. Definitely more columns than it needs. In the 1820s, this building was the center of the American financial world. It was the bank of the United States. And the bank of the United States in the 1820s was unlike anything we have in this country today.

In fact, it was unlike anything else they had in the country back then. There were lots of little local state banks, but the Bank of the U.S. was the only bank in the country that operated all over the country. It was created by an act of Congress that gave it a monopoly to do that. The federal government kept its money there, did its banking with the Bank of the US. But the Bank of the US was a private corporation, answerable to its shareholders, run for a profit. And inside this Greek building, in the very back in a giant office, was a man with his fingertips stuck together in a thousand

yard stare. Sitting on a throne. Sitting on a throne. Made of the bones of Alexander Hamilton. Nicholas Biddle, the president of the Bank of the United States. In any movie of this, Biddle would be the villain. Oh, oh, you hurt me saying that. This is Cordelia Frances Biddle, Nicholas Biddle's great, great, great granddaughter.

You're right. It's not personal. Well, I take it personally because I'm writing about him. It's not even personal to Biddle though. Like, you know what I mean? It's just structurally. He's like the rich banker. Like, of course he's the villain.

Of course, yeah, absolutely right. And I would have, I would have said that four years ago. Yeah. And you're a Biddle. And I'm a Biddle. Cordelia's opinion about her, whatever, great, great, great grandfather, it changed when she learned something important about him. She learned that Nicholas Biddle was really good at his job as, you know, head of the Bank of the U.S. And that was really good for the U.S. in a bunch of different ways. The Bank of the United States was doing a lot of the economic stuff that today is the

job of the federal government and the Federal Reserve. So for one thing, the Bank of the U.S. back then printed paper money. At the time, official government money was just gold and silver coins. The government didn't make any paper money as we know it. And if you took your gold coins to a local bank, that bank would give you a piece of paper with the bank's name on it, sort of like an IOU, a claim check. You or anyone else could turn that into the bank to get your gold back. These bank notes became functionally money.

It was an incredible amount of power. And having all of this power put Biddle at the center of this small club of elites who were running America. And he is great friends with all the presidents, with Adams, with Madison. And you can see even just through his diary writings, he loved being in this position.

He loved being a banker so much, he wrote a poem about it. You ready? I'm ready. Here's a couplet. I prefer my last letter from bearings or hope. Bearings and hope are banks. So I prefer my last letter from bearings or hope to the finest epistles of Pliny or Pope. Who are writers?

Yes, writers. Maybe it's Pliny. Pliny the Elder? Don't know. The point being, he was not much of a poet. He was really good at banking. Nicholas Old School Biddle had found his thing, running the Bank of the United States. He figured he'd do it forever.

There was only one thing standing in his way, Andrew Jackson. As far as I can tell, Jackson is the only person who would become president of the United States to have killed a man in cold blood. This is H.W. Brands, he's a historian at the University of Texas. And he said, you know, Jackson was not in Biddle's club, where you pal around with former presidents

and write poems about banking. He was in the club of people who shot at each other in duels. He told us about this time that Jackson demanded a duel from Charles Dickinson, a man who had made the bad choice of insulting Andrew Jackson's wife. He stood and took a bullet from Dickinson. The bullet lodged itself quite close to Jackson's heart but just missed, in part because Jackson was a skinny guy and he was wearing this sort of large overcoat. And with that bullet next to his heart, Jackson leveled his pistol and shot Charles Dickinson. Mortally wounded him, he died several hours later. You know, voters loved these kind of stories about Andrew Jackson. In fact, he was elected president in 1828.

And, you know, today Jackson is this, is this really very controversial figure, right? He may be best known now for the horrific way he treated Native Americans. But at the time, that was not the way people saw Jackson. They saw him as this, as this man of the people. And that he was bringing the people with him into the White House.

I mean, quite literally, there are these stories about his inauguration party, where there's pails of liquor, and it's crowded, and people are breaking glasses. People are, like, rushing the people, bringing the whiskey punch out, and it's, like, knocking it over. And it got so out of hand, they had to move the whiskey punch out onto the front lawn

just to get people out of the White House. It's a classic solution. No more booze in the house. And like any good populist, Jackson did not like banks. In his particular case, he even hated paper money. He thought the country should just be run on gold and silver, which was not like some crazy fringe view at the time. I mean, to get your head into it, think about the way a lot of people feel now about like all the sketchy mortgage products that banks cooked up in the housing bubble of the 2000s. That is how a lot of people thought about paper money back then.

And for good cause. I mean, banks in the 1800s would all of a sudden just go out of business and the bank notes, their IOUs for gold. The paper money. Would be worthless. So imagine then how Jackson felt about a bank of the United States with special powers granted by the federal government. It was a private bank. It had its own board of directors. And people increasingly thought that this thing, this national bank, that operated at the behest of the government ought

to be answerable to the government. But this bank of the United States was not answerable to the government. So you have a president who hates banks, who has literally killed another human being, and Nicholas Biddle decides he's going to go visit him. And it's shockingly cordial. Jackson says to Biddle, here's the quote, I do not dislike your bank any more than all banks. In other words, it's not personal. I just think what you do is a total scam that is bad for America. And then Biddle says, well, I'm very much gratified at this frank explanation.

In other words, thanks for not shooting me. Let's not do this kind of meeting ever again. And then after the meeting, Biddle's like telling his friend about Jackson — and he calls Jackson's ideas about banking, quote, the honest, though erroneous notions of one who intends well. In other words, I take Jackson seriously, but not literally. But Biddle knows trouble is coming. The Bank of the United States, it has to be reauthorized every 20 years. Just to stay in business, Congress has to pass a bill and the president has to sign it into law. Otherwise, the bank is done for. And so Biddle comes up with this plan. He is gonna go on the offensive.

He figures people are kind of liking the Bank of the United States. Jackson's up for re-election. I'm gonna push this bill now, get it quickly before Congress and put pressure on Andrew Jackson to renew my precious bank charter. So Biddle pulls together this army of supporters in Congress. You know, powerful politicians, well-connected politicians, and his, like his star player in Congress is the senator from Massachusetts, Daniel Webster. If you were alive in the 1820s, you would be so excited right now. When Daniel Webster rose to speak, Washington stopped doing what it was doing

and people flocked to the Senate to listen to Daniel Webster. It was high drama, it was wonderful entertainment, and you could be educated in the process. What people didn't generally know though, was that Daniel Webster was on a retainer with the Bank of the United States. That he was getting paid by the bankers? Yeah, he was getting paid by Nicholas Biddle personally to, well, to represent the bank

while he was a senator for Massachusetts. Is that legal? Was that legal? Could you do that? It wasn't illegal. So the great order and paid shell Daniel Webster rises to speak. He says many of you, many of you, including our dear president, do not like banks printing all of this paper money. And I get it. I get it. You want safe and sound money. And he says, okay, if you want safe and sound money, and who doesn't, the Bank of the United

States is good. Huzzah. The Bank of the U.S. is your friend. Huzzah. Because the Bank of the U.S. is a cautious conservative bank. You know, it doesn't just run around printing paper money like crazy. In fact, it reigns in all of those state banks. He says, and I do quote here, in the absence of a bank of the United States, the state banks become effectively

the regulators of the public currency. Their numbers, their capital, and the interests connected with them give them a power which nothing is competent to control. In other words, Webster's saying, if you think the bank of the United States is shady and out of control, you should see the state banks.

And the Senate buys it. Congress passes a law to give Biddle's Bank another 20 years of life. Biddle is in Washington, D.C. for the event. He gets cheered inside the Capitol. He throws a party that goes late into the night. And then on July 4th, as it happens, 1832, that bill lands on Jackson's desk for him to sign into law. Jackson looks at it, considers it for a moment, and says, oh, hell no. Not a direct quote, but Jackson does veto the bill.

And in fact, he writes this famous veto message, like this populist document, that says, in part, when the laws make the rich richer and the potent more powerful, the humble members of society have a right to complain of the injustice of their government. The bank of the United States will be no more. And Biddle actually thinks at this moment, I've got him right where I want him. He thinks this veto is going to cost Jackson the election. He calls him like a panther biting at the bars of his cage and he pays to reprint thousands of copies of this veto message to use as like an attack ad.

And he miscalculated. People love the veto. They love the veto message, right? The humble members of society, the people's president overruling a corrupt Congress to fight elite bankers. I mean, you cannot lose with that. Jackson wins reelection in a landslide. Soterios Johnson Five years later, the economy of the United

States is completely destroyed. Aaron Ross Yeah, about that. It is the Panic of 1837. Banks collapse, people lose their jobs, there's not enough gold and silver to go around. And this would usher in a sort of age of booms and busts and panics really for the next 75 years. We'll talk about why after the break. As we look back at history and let's be honest, that is the goal of summer school this year,

we see that there's a regular cycle of good times and bad times, booms and busts, the business cycle, if you want to be academic about it. And back in the day, like now, governments weren't quite sure what to do about this. You wanted people to start businesses, take risks, make money in the good times. But when businesses started to fail, government didn't yet have the tools to help out. Especially at risk during the bad times were the banks. A bank is a sort of psychological trick

that only works if you trust the bank, trust the person in the top hat to hold your money and invest it. But when people started to get scared during the bad times, they would rush to the banks, demand their money back. You know this, it's called a bank run. And if you have a bunch of bank runs, it's called panic, panic.

Let's bring back in our professor, Sharon Murphy, from Providence College, who is, thank goodness, a little bit of an expert on the panics of the United States. When we ended the episode about Nicholas Biddle and Andrew Jackson, the Bank of the United States was no more, and the panic of 1837 had just begun. We consider this sort of the age of the panics. So what is a panic and how many were there?

Oh, well, there's lots of panics. A panic is just when people lose confidence in the economic system. So the banking system is built on trust and confidence. People have to have, depositors, is built on trust and confidence. People have to have, depositors, shareholders have to have confidence that their bank is investing their funds wisely. Banks have to have confidence that debtors are paying off their loans when they're due.

Bank note holders have to trust that the bank has gold and silver in their vaults to redeem their notes. And the panic occurs when you lose trust, you lose confidence, you lose predictability, and it's replaced by the fear of the unknown. People no longer know who they can trust, which banks are sound, which debtors are reliable, which investments are safe. And we see the same sort of behavior in every panic.

People in the street, mobbing the banks, demanding their money back, hoarding all their cash. In the case of the Panic of 1837, what caused this huge loss of trust? Yeah, so leading up to 1837, the economy entered a real growth period, partially because of the bank war. The Bank of the United States is no longer there to kind of keep these banks in check. And then it all comes to a screeching halt. So this is 1837, but we see this time and time again, right?

Part of the economy does well. Money pours in the bubble, the bust. It starts to happen a lot really. Yeah. It depends on how you count it. Major ones happen every 15 to 20 years with some minor ones in between. But yeah, this becomes a cycle in the economy. These are smart people. They know the panics are coming. They know the bubble and the bursting the bubble is going to happen. Why can't they avoid it? Oh, well, everybody thinks this is the last one. Everybody thinks it's never going to happen again. Everybody wants to, thinks they're

going to get out before the bottom drops out. They think they can take advantage of the boom before the bust occurs. Some of it is hubris. They think that they have figured it out and it's not going to happen again. And yeah, and each time there are slight differences. So it doesn't necessarily look exactly the same. So they think, well, maybe this time is going to be different. And I suppose even those people who realized there was a problem, there wasn't much they could do

about it. As we saw in the Andrew Jackson episode, there was a real distrust of the federal government putting economic rules onto all of the states. It would take something very big for the U.S. government to start to centralize the banks and the currency. Our next historical flashback deals with this exact issue. From an episode we first aired in 2012, I'll let David Kestenbaum and Jacob Goldstein take it from here. Imagine you're a bartender in New York City in the year 1859. The bar where you work looks pretty familiar. There's a wooden bar, stools, tables, some people drinking. But now go behind the bar and open up the box

where you keep the money. What you see there is crazy. You'll see a big mess. You could see any one of 8,000 different kinds of state bank notes and local bank notes. You'll see small change. You might see small change that's been cut up into pieces.

Did you say 8,000? I did say 8,000. Yeah, it's not a good system. That world you just heard described by Brian Murphy, he's a historian at Baruch College, it is amazing to me that it existed at all. Why didn't our founding fathers, when they're setting up a new country, I mean, you set up a new country, you need a national anthem to sing, you need a flag, and you need a currency. The US government did create a currency, did issue some gold and silver coins, but there were not enough of these coins to go around. The government was not printing paper money.

For the most part, the government did what countries all around the western world did at the time and let people use whatever they wanted as money. Often what they wanted to use as money was these pieces of paper issued by banks that were called banknotes. Matt Juremski, an economist at Colgate University, he says sometimes the banknotes would have these very serious pictures of like bank presidents on them, but that was not always the case. So I'm looking at the Howard Banking Company's $5 banknote. It's one of my personal favorites because it's a Santa Claus note. What? Santa Claus?

A Santa Claus note. You get a picture, I think, of the bank president up in the left-hand corner, and then right in the middle you get a picture of Santa Claus on a sleigh. So what basically this note will do is that if you have this note, Santa Claus and all, you'll go to the Howard Banking Company and they are obligated to pay you $5 in gold and silver coins if you demand it at their bank. If you demand it at their bank, but nobody else outside that bank is required to give you gold or silver for the note or for that matter, even to accept it at all. Sometimes people might choose to take the bill at full face value.

Sometimes they might not want it. Sometimes they'll say, yeah, I'll accept it, but it's a $5 bill. I'll give you $4 for it. A dollar bill was not always worth a dollar in this world. Now, you could argue, and some people do, that this universe of 8,000 different kinds of currency is the free market at work, and that this market for banknotes helped keep banks honest. But this world, it did create huge problems for people. People, for example, like this one traveler who kept a diary. Matt Juremski is going to read from it. And before you hear it, there is one term that may be unfamiliar.

The term is shin plaster. It means worthless paper. Okay, here's the diary entry. Starting from Virginia with Virginia money, reached the Ohio River, exchanged $20 Virginia note for shin plasters and a $3 note of the Bank of the West Union. Paid away the $3 note for breakfast,

reached Tennessee, received a $100 Tennessee note, went back to Kentucky, forced there to exchange the Tennessee note for $88 of Kentucky money. Started home with the Kentucky money in Virginia and Maryland, 100 yards from the Tavern door, all notes refused except Baltimore and Ohio Railroad. So that's if you're trying to spend money. What if you run a store?

What if you run that bar in New York and some guy walks in and gives you some bill that you've never seen before? What do you do? Well, that's when you take out your trusty bank note reporter, this huge book the size of a phone book. This thing, it tells you what bills are in circulation, what they're supposed to look like and how much they might be worth. You would take out this big, you know, encyclopedia looking thing and you'll say, okay, you know,

if it's the Howard banking note, you'd look in this, you'd find the Howard banking company list. It would then tell you where the bank was, and then it would tell you at what discount the note was to be accepted at. So, for instance, if this was a particularly good bank, $5 note would trade at $5. You as the bartender would accept it at that. If it was trading at a discount, it would also say that. If the bank had defaulted, you'd know that, that and you know that it's worthless and not to accept it And these books new ones come out every month to keep up with the news and you have a different book for every city

This is because a bill from say a Boston bank might be worth five dollars in Boston But only four dollars in New York Usually the further you get from a bank the less its money is worth People's money loses value just because they're traveling. And we haven't even mentioned counterfeiting yet. Here's Brian Murphy. This is the great Huxter scam of the 19th century. People make up fake banks.

One of my favorite ones is a, it's issued by, I think the Bank of the Golden Fleece, right? And whoever takes it is getting fleeced, right? That's right. That's right. So the engraving, right? And whoever takes it is getting fleeced, right? That's right. That's right. So the engraving, right, the detail of this beautiful engraving on the front is this fleece, is the sheep being shorn. You might think the next step in the story is that the government decides, this is crazy. We are going to have one central currency. But that is not how it happens.

No, that is not how it happens. What happens is the Civil War. And the war is incredibly expensive. The government, the Union, starts to run out of money. And it needs to buy cannons and bullets and pay soldiers. And so the federal government does two dramatic things. Dramatic thing number one, the government prints up paper money and uses it to buy stuff. This paper money, it's called greenbacks.

And David, I actually printed out one. I think it's sitting in front of you there. So basically, it's green, we could say, perhaps. Obviously, it's called a greenback. And you know, it looks a lot like a dollar bill or a $10 bill. This is actually a picture of a $10 note. It's got a picture of Abraham Lincoln on it. It's got an eagle.

It says United States. It's got a one and a zero. It's written out $10. It looks like a $10 bill, an old $10 bill. And this was basically the first dollar bill issued by the US government. Though during the war, these dollars, they were not always worth a dollar in gold.

So oftentimes you would have discounts of early on a couple cents as the war wasn't going in the US's favor or actually the Union's favor. However, once the Union kind of started winning a lot of the battles, you'd have you had it shoot back up because it was a bet on the Union's victory. So this was not a plan to establish a single national currency. It was a plan to fund a war. Dremski says the greenbacks, they were seen as an emergency thing, something a government would only do in time of war.

The underlying belief was that these greenbacks were temporary in the sense that we would issue them, the war would end, and that, you know, within 10 years they'd be gone. The problem was the consumers kind of liked them. Surprising then, not surprising today. Would you rather use a bill issued by a bank you're not sure exists, or would you want to use a bill that everyone recognizes? So the greenback, that was dramatic thing number one. And dramatic thing number two,

slightly wonkier than the greenback, but equally important, national banks. Banks that are regulated not by states, but by the federal government. These banks are created during the Civil War and they also help raise money for the Union because in order to be a national bank, you had to buy government bonds. In other words, you had to lend money to the government. Sneaky.

And these banks, of course, they could issue their own banknotes. And at the end of the Civil War, the government actually starts putting a tax on those old banknotes issued by the state bank. So after the Civil War, the only paper money that's circulating is the greenbacks and the banknotes issued by the national banks. And those banknotes issued by the national banks, they all start to look alike. So in the post-war years, there's this convergence. Bills are looking more and more uniform, and for the first time, they're all worth what they say they're worth.

So if you have a $10 first national banknote of New York, then that will trade in that bar at $10. Okay, so anywhere you travel to, so if you took that first national bank of New York banknote into, say, Ohio or Wyoming or Louisiana, it's still going to trade at its face value. So the United States, at this point, has kind of accidentally stumbled on an economic innovation. A $10 bill that's worth $10 in New York and in Connecticut and in New Jersey.

You can take it all the way to Wyoming and it is still worth $10. And now finally, if you're a bartender, life is much easier. So this bartender has a lot of free time now. Every time he gets a note, he doesn't have to pull out this big book and set it on the bar. At the end of the day, he doesn't have to go find brokers to exchange these bank notes. All he has to do is kind of take it and accept it. He's got time.

He can go and do something important like invent the martini. So this really is how we got from a world of 8,000 kinds of money and of monthly guides that tell you if a $5 bill is actually worth $4 to the world basically that we know today, where if somebody gives you a $5 bill, you know it's worth $5. This makes travel and trade much, much more efficient and really more broadly, the Civil War is this moment when the US finally answers this question, are we one country or are we lots of little countries? The answer, of course, are we one country or are we lots of little countries?

The answer, of course, we're one country and this is true for our money as well. Jacob Goldstein and David Kestenbaum from 2012. After the break, the United States now has the power of one currency. Can it stop all the panics? We'll have a professor back to give us the final lesson. Summer school, back in session with our illustrious professor from Providence College, Sharon Murphy. Thanks for having me back. So, as we tell this story, the United States now has a dollar bill, essentially, a single currency, and yet, and which had a dramatic effect on the economic system, but that didn't change the reasons

that we were having booms and busts. Because we still had moments of over-exuberance, good economic times, and then busts, bad economic times. And more importantly, there wasn't a way to calm people down about the banks, to guarantee that when we put money into a bank, we will actually be able to get it out. So what was the fundamental problem here? Oftentimes, banks have a lot of loans that they're responsible for, don't necessarily

have all the money they need in their vault. Doesn't mean they're unstable or bad loans. They just is, they need something just for the short term to help them through. And I know in the early 1900s, that short-term solution was often just rich guys. Millionaires around would lend money to banks to keep them in business and to stop the panics. I mean, the most famous was J.P. Morgan

and the panic of 1907. But at some point, the most famous was J.P. Morgan and the panic of 1907. But at some point, the U.S. government said, we cannot rely on rich guys to come to the aid of our banks. We need to create something big, like a national bank even bigger than Nicholas Biddle could have imagined, a central bank, a federal reserve, what they call the lender of last resort. Yeah. Federal Reserve, what they call the lender of last resort. Yeah, so the idea of the lender of last resort is that the Federal Reserve can give them a short-term infusion of money to get them over that hump

until some of those loans come in or some other payments that they have due. It buys the bank's time until the panic is over. And we should say the creation of the Federal Reserve, it isn't immediately a miracle cure. There is the Great Depression. But after that, after the Great Depression, the US stops having these huge panics

and economic collapses every decade. Things just get calmer. And so Sharon, looking back at the 200 years of financial history we've covered in just a short episode, what is the lesson we should learn moving forward from this? Well, I think there's a couple lessons you can take. Economic growth depends on the willingness to take risks, but the key is to make sure that the people

making these risks, the people who receive the benefits when the risks pay off, that they also suffer the consequences when the risks fail. So a lot of the times they take these risks and then it's the rest of us that suffer the consequences or the government comes in and saves them. So trying to find a way to balance allowing risk taking without allowing these risk takers to sink the entire economy as a result of their own greed. So finding that regulatory balance there is really what we need to somehow learn.

And we haven't quite learned it yet, I don't think. We have not quite learned it yet. I mean, we have in the last two years seen major banks collapse and the same ringing of the hands that happened, well, back in Nicholas Biddle's day, it's happening again. How much risk should be allowed? How much should you back up banks? How do you stop people from creating these bubbles

in various areas? And what guardrails should be put around those banks or any corporate institutions, what guardrails should be put around those banks or any corporate institutions, what guardrails should be put around them to protect the economy from over exuberance on the part of some people. Do you ever read the news and say, oh, not again? Oh, all the time. It's a hazard of being a historian that you are constantly seeing the repetition and shaking

your head and saying, oh, did we do we not learn anything? Well, hopefully here on Planet Money Summer School, we are learning something. This is why we like to give vocabulary words at the very end of the episode. So maybe, Professor, you can help us out with the word panic. No longer having faith in the economic system and jumping ship. Widespread economic collapse. And also on our vocabulary list, the boom and bust cycle. The economy's doing really well and then the bottom falls out.

Over and over again. Over and over again. Lender of last resort. An entity like the Federal Reserve or another kind of central bank stepping in to stabilize a bank that is secure but has short term liquidity issues. Pump some money into it. Pump some money into it, exactly. Sharon Murphy, our professor who did not panic during this interview. Thank you so much for coming in. Thanks so much for having me.

Well, look at that. We are halfway through our economic history of the world. How the summer and the centuries just fly by, they fly by. Remember that at the end of the summer, you will be able to get an online Planet Money diploma that will allow you to settle debates at cocktail parties and say, well, actually to all of your friends. And remember to check out the Planet Money TikTok. They're picking a concept from each of our summer

school episodes and explaining it in such a fun way. You won't even realize you're learning. We'll be back next Wednesday with another history lesson about one of the most powerful economic forces on the planet, free trade. Planet Money Summer School is produced by Audrey Dilling. Our project manager is Devon Meller. This episode is fact checked by Sofia Shukuna and edited by Planet Money executive producer

Alex Goldmark. He was engineered by James Willett. I'm Robert Smith. This is NPR. Thanks for listening.