Too big to fail

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https://en.wikipedia.org/wiki/Too_big_to_fail

Headquarters of AIG, an insurance company rescued by the United States government during the subprime mortgage crisis

The "too big to (let) fail" theory asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and that they therefore must be supported by government when they face potential failure. The colloquial term "too big to fail" was popularized by U.S. Congressman Stewart McKinney in a 1984 Congressional hearing, discussing the Federal Deposit Insurance Corporation's intervention with Continental Illinois. The term had previously been used occasionally in the press.

Proponents of this theory believe that some institutions are so important that they should become recipients of beneficial financial and economic policies from governments or central banks. Some economists such as Paul Krugman hold that economies of scale in banks and in other businesses are worth preserving, so long as they are well regulated in proportion to their economic clout, and therefore that "too big to fail" status can be acceptable. The global economic system must also deal with sovereign states being too big to fail.

Opponents believe that one of the problems that arises is moral hazard whereby a company that benefits from these protective policies will seek to profit by it, deliberately taking positions (see asset allocation) that are high-risk high-return, as they are able to leverage these risks based on the policy preference they receive. The term has emerged as prominent in public discourse since the 2007–08 global financial crisis. Critics see the policy as counterproductive and that large banks or other institutions should be left to fail if their risk management is not effective. Some critics, such as Alan Greenspan, believe that such large organisations should be deliberately broken up: "If they're too big to fail, they're too big". More than fifty prominent economists, financial experts, bankers, finance industry groups, and banks themselves have called for breaking up large banks into smaller institutions.

In 2014, the International Monetary Fund and others said the problem still had not been dealt with. While the individual components of the new regulation for systemically important banks (additional capital requirements, enhanced supervision and resolution regimes) likely reduced the prevalence of TBTF, the fact that there is a definite list of systemically important banks considered TBTF has a partly offsetting impact.

Definition

Federal Reserve Chair Ben Bernanke also defined the term in 2010: "A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences." He continued that: "Governments provide support to too-big-to-fail firms in a crisis not out of favoritism or particular concern for the management, owners, or creditors of the firm, but because they recognize that the consequences for the broader economy of allowing a disorderly failure greatly outweigh the costs of avoiding the failure in some way. Common means of avoiding failure include facilitating a merger, providing credit, or injecting government capital, all of which protect at least some creditors who otherwise would have suffered losses. ... If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved."

Bernanke cited several risks with too-big-to-fail institutions:

1. These firms generate severe moral hazard: "If creditors believe that an institution will not be allowed to fail, they will not demand as much compensation for risks as they otherwise would, thus weakening market discipline; nor will they invest as many resources in monitoring the firm's risk-taking. As a result, too-big-to-fail firms will tend to take more risk than desirable, in the expectation that they will receive assistance if their bets go bad."
2. It creates an uneven playing field between big and small firms. "This unfair competition, together with the incentive to grow that too-big-to-fail provides, increases risk and artificially raises the market share of too-big-to-fail firms, to the detriment of economic efficiency as well as financial stability."
3. The firms themselves become major risks to overall financial stability, particularly in the absence of adequate resolution tools. Bernanke wrote: "The failure of Lehman Brothers and the near-failure of several other large, complex firms significantly worsened the crisis and the recession by disrupting financial markets, impeding credit flows, inducing sharp declines in asset prices, and hurting confidence. The failures of smaller, less interconnected firms, though certainly of significant concern, have not had substantial effects on the stability of the financial system as a whole."

Background on banking regulation

Depository banks

Prior to the Great Depression, U.S. consumer bank deposits were not guaranteed by the government, increasing the risk of a bank run, in which a large number of depositors withdraw their deposits at the same time. Since banks lend most of the deposits and only retain a fraction in the proverbial vault, a bank run can render the bank insolvent. During the Depression, hundreds of banks became insolvent and depositors lost their money. As a result, the U.S. enacted the 1933 Banking Act, sometimes called the Glass–Steagall Act, which created the Federal Deposit Insurance Corporation (FDIC) to insure deposits up to a limit of $2,500, with successive increases to the current $250,000. In exchange for the deposit insurance provided by the federal government, depository banks are highly regulated and expected to invest excess customer deposits in lower-risk assets.

Investment banks and the shadow banking system

In contrast to depository banks, investment banks generally obtain funds from sophisticated investors and often make complex, risky investments with the funds, speculating either for their own account or on behalf of their investors. They also are "market makers" in that they serve as intermediaries between two investors that wish to take opposite sides of a financial transaction. The Glass-Steagall Act separated investment and depository banking until its repeal in 1999. Prior to 2008, the government did not explicitly guarantee the investor funds, so investment banks were not subject to the same regulations as depository banks and were allowed to take considerably more risk.

Investment banks, along with other innovations in banking and finance referred to as the shadow banking system, grew to rival the depository system by 2007. They became subject to the equivalent of a bank run in 2007 and 2008, in which investors (rather than depositors) withdrew sources of financing from the shadow system. This run became known as the subprime mortgage crisis. During 2008, the five largest U.S. investment banks either failed (Lehman Brothers), were bought out by other banks at fire-sale prices (Bear Stearns and Merrill Lynch) or were at risk of failure and obtained depository banking charters to obtain additional Federal Reserve support (Goldman Sachs and Morgan Stanley). In addition, the government provided bailout funds via the Troubled Asset Relief Program in 2008.

Fed Chair Ben Bernanke described in November 2013 how the Panic of 1907 was essentially a run on the non-depository financial system, with many parallels to the crisis of 2008. One of the results of the Panic of 1907 was the creation of the Federal Reserve in 1913.

Resolution authority

Before 1950, U.S. federal bank regulators had essentially two options for resolving an insolvent institution: 1) closure, with liquidation of assets and payouts for insured depositors; or 2) purchase and assumption, encouraging the acquisition of assets and assumption of liabilities by another firm. A third option was made available by the Federal Deposit Insurance Act of 1950: providing assistance, the power to support an institution through loans or direct federal acquisition of assets, until it could recover from its distress.

The statute limited the "assistance" option to cases where "continued operation of the bank is essential to provide adequate banking service". Regulators shunned this third option for many years, fearing that if regionally or nationally important banks were thought generally immune to liquidation, markets in their shares would be distorted. Thus, the assistance option was never employed during the period 1950–1969, and very seldom thereafter. Research into historical banking trends suggests that the consumption loss associated with National Banking Era bank runs was far more costly than the consumption loss from stock market crashes.

The Federal Deposit Insurance Corporation Improvement Act was passed in 1991, giving the FDIC the responsibility to rescue an insolvent bank by the least costly method. The Act had the implicit goal of eliminating the widespread belief among depositors that a loss of depositors and bondholders will be prevented for large banks. However, the Act included an exception in cases of systemic risk, subject to the approval of two-thirds of the FDIC Board of Directors, the Federal Reserve Board of Governors, and the Treasury Secretary.

Analysis

Bank size and concentration

Assets of largest U.S. banks per FY2012 Annual Reports

 

Percentage of banking assets held by largest five U.S. banks, 1997–2011

 

Bank size, complexity, and interconnectedness with other banks may inhibit the ability of the government to resolve (wind-down) the bank without significant disruption to the financial system or economy, as occurred with the Lehman Brothers bankruptcy in September 2008. This risk of "too big to fail" entities increases the likelihood of a government bailout using taxpayer dollars.

The largest U.S. banks continue to grow larger while the concentration of bank assets increases. The largest six U.S. banks had assets of $9,576 billion as of year-end 2012, per their 2012 annual reports (SEC Form 10K). For scale, this was 59% of the U.S. GDP for 2012 of $16,245 billion. The top 5 U.S. banks had approximately 30% of the U.S. banking assets in 1998; this rose to 45% by 2008 and to 48% by 2010, before falling to 47% in 2011.

This concentration continued despite the subprime mortgage crisis and its aftermath. During March 2008, JP Morgan Chase acquired investment bank Bear Stearns. Bank of America acquired investment bank Merrill Lynch in September 2008. Wells Fargo acquired Wachovia in January 2009. Investment banks Goldman Sachs and Morgan Stanley obtained depository bank holding company charters, which gave them access to additional Federal Reserve credit lines.

Bank deposits for all U.S. banks ranged between approximately 60–70% of GDP from 1960 to 2006, then jumped during the crisis to a peak of nearly 84% in 2009 before falling to 77% by 2011.

The number of U.S. commercial and savings bank institutions reached a peak of 14,495 in 1984; this fell to 6,532 by the end of 2010. The ten largest U.S. banks held nearly 50% of U.S. deposits as of 2011.

Implicit guarantee subsidy

Since the full amount of the deposits and debts of "too big to fail" banks are effectively guaranteed by the government, large depositors and investors view investments with these banks as a safer investment than deposits with smaller banks. Therefore, large banks are able to pay lower interest rates to depositors and investors than small banks are obliged to pay.

In October 2009, Sheila Bair, at that time the Chairperson of the FDIC, commented:

"'Too big to fail' has become worse. It's become explicit when it was implicit before. It creates competitive disparities between large and small institutions, because everybody knows small institutions can fail. So it's more expensive for them to raise capital and secure funding." Research has shown that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being too big to fail.

A study conducted by the Center for Economic and Policy Research found that the difference between the cost of funds for banks with more than $100 billion in assets and the cost of funds for smaller banks widened dramatically after the formalization of the "too big to fail" policy in the U.S. in the fourth quarter of 2008. This shift in the large banks' cost of funds was in effect equivalent to an indirect "too big to fail" subsidy of $34 billion per year to the 18 U.S. banks with more than $100 billion in assets.

The editors of Bloomberg View estimated there was an $83 billion annual subsidy to the 10 largest United States banks, reflecting a funding advantage of 0.8 percentage points due to implicit government support, meaning the profits of such banks are largely a taxpayer-backed illusion.

Another study by Frederic Schweikhard and Zoe Tsesmelidakis estimated the amount saved by America's biggest banks from having a perceived safety net of a government bailout was $120 billion from 2007 to 2010. For America's biggest banks the estimated savings was $53 billion for Citigroup, $32 billion for Bank of America, $10 billion for JPMorgan, $8 billion for Wells Fargo, and $4 billion for AIG. The study noted that passage of the Dodd–Frank Act—which promised an end to bailouts—did nothing to raise the price of credit (i.e., lower the implicit subsidy) for the "too-big-too-fail" institutions.

One 2013 study (Acharya, Anginer, and Warburton) measured the funding cost advantage provided by implicit government support to large financial institutions. Credit spreads were lower by approximately 28 basis points (0.28%) on average over the 1990–2010 period, with a peak of more than 120 basis points in 2009. In 2010, the implicit subsidy was worth nearly $100 billion to the largest banks. The authors concluded: "Passage of Dodd–Frank did not eliminate expectations of government support."

Economist Randall S. Kroszner summarized several approaches to evaluating the funding cost differential between large and small banks. The paper discusses methodology and does not specifically answer the question of whether larger institutions have an advantage.

During November 2013, the Moody's credit rating agency reported that it would no longer assume the eight largest U.S. banks would receive government support in the event they faced bankruptcy. However, the GAO reported that politicians and regulators would still face significant pressure to bail out large banks and their creditors in the event of a financial crisis.

Moral hazard

A man at Occupy Wall Street protesting institutions deemed too big to fail

Some critics have argued that "The way things are now banks reap profits if their trades pan out, but taxpayers can be stuck picking up the tab if their big bets sink the company." Additionally, as discussed by Senator Bernie Sanders, if taxpayers are contributing to rescue these companies from bankruptcy, they "should be rewarded for assuming the risk by sharing in the gains that result from this government bailout".

In this sense, Alan Greenspan affirms that, "Failure is an integral part, a necessary part of a market system." Thereby, although the financial institutions that were bailed out were indeed important to the financial system, the fact that they took risk beyond what they would otherwise, should be enough for the Government to let them face the consequences of their actions. It would have been a lesson to motivate institutions to proceed differently next time.

Inability to prosecute

The political power of large banks and risks of economic impact from major prosecutions has led to use of the term "too big to jail" regarding the leaders of large financial institutions.

On March 6, 2013, United States Attorney General Eric Holder testified to the Senate Judiciary Committee that the size of large financial institutions has made it difficult for the Justice Department to bring criminal charges when they are suspected of crimes, because such charges can threaten the existence of a bank and therefore their interconnectedness may endanger the national or global economy. "Some of these institutions have become too large," Holder told the Committee. "It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate." In this he contradicted earlier written testimony from a deputy assistant attorney general, who defended the Justice Department's "vigorous enforcement against wrongdoing". Holder has financial ties to at least one law firm benefiting from de facto immunity to prosecution, and prosecution rates against crimes by large financial institutions are at 20-year lows.

Four days later, Federal Reserve Bank of Dallas President Richard W. Fisher and Vice-President Harvey Rosenblum co-authored a Wall Street Journal op-ed about the failure of the Dodd–Frank Wall Street Reform and Consumer Protection Act to provide for adequate regulation of large financial institutions. In advance of his March 8 speech to the Conservative Political Action Conference, Fisher proposed requiring breaking up large banks into smaller banks so that they are "too small to save", advocating the withholding from mega-banks access to both Federal Deposit Insurance and Federal Reserve discount window, and requiring disclosure of this lack of federal insurance and financial solvency support to their customers. This was the first time such a proposal had been made by a high-ranking U.S. banking official or a prominent conservative. Other conservatives including Thomas Hoenig, Ed Prescott, Glenn Hubbard, and David Vitter also advocated breaking up the largest banks, but liberal commentator Matthew Yglesias questioned their motives and the existence of a true bipartisan consensus.

In a January 29, 2013 letter to Holder, Senators Sherrod Brown (D-Ohio) and Charles Grassley (R-Iowa) had criticized this Justice Department policy citing "important questions about the Justice Department's prosecutorial philosophy". After receipt of a DoJ response letter, Brown and Grassley issued a statement saying, "The Justice Department's response is aggressively evasive. It does not answer our questions. We want to know how and why the Justice Department has determined that certain financial institutions are 'too big to jail' and that prosecuting those institutions would damage the financial system."

Kareem Serageldin pleaded guilty on November 22, 2013 for his role in inflating the value of mortgage bonds as the housing market collapsed, and was sentenced to two and a half years in prison. As of April 30, 2014, Serageldin remains the "only Wall Street executive prosecuted as a result of the financial crisis" that triggered the Great Recession.

Solutions

The proposed solutions to the "too big to fail" issue are controversial. Some options include breaking up the banks, introducing regulations to reduce risk, adding higher bank taxes for larger institutions, and increasing monitoring through oversight committees.

Breaking up the largest banks

More than fifty economists, financial experts, bankers, finance industry groups, and banks themselves have called for breaking up large banks into smaller institutions. This is advocated both to limit risk to the financial system posed by the largest banks as well as to limit their political influence.

For example, economist Joseph Stiglitz wrote in 2009 that: "In the United States, the United Kingdom, and elsewhere, large banks have been responsible for the bulk of the [bailout] cost to taxpayers. America has let 106 smaller banks go bankrupt this year alone. It's the mega-banks that present the mega-costs ... banks that are too big to fail are too big to exist. If they continue to exist, they must exist in what is sometimes called a "utility" model, meaning that they are heavily regulated." He also wrote about several causes of the crisis related to the size, incentives, and interconnection of the mega-banks.

Reducing risk-taking through regulation

The leverage ratio, measured as debt divided by equity, for investment bank Goldman Sachs from 2003–2012. The lower the ratio, the greater the ability of the firm to withstand losses.

 

The United States passed the Dodd–Frank Act in July 2010 to help strengthen regulation of the financial system in the wake of the subprime mortgage crisis that began in 2007. Dodd–Frank requires banks to reduce their risk taking, by requiring greater financial cushions (i.e., lower leverage ratios or higher capital ratios), among other steps.

Banks are required to maintain a ratio of high-quality, easily sold assets, in the event of financial difficulty either at the bank or in the financial system. These are capital requirements. Further, since the 2008 crisis, regulators have worked with banks to reduce leverage ratios. For example, the leverage ratio for investment bank Goldman Sachs declined from a peak of 25.2 during 2007 to 11.4 in 2012, indicating a much-reduced risk profile.

The Dodd–Frank Act includes a form of the Volcker Rule, a proposal to ban proprietary trading by commercial banks. Proprietary trading refers to using customer deposits to speculate in risky assets for the benefit of the bank rather than customers. The Dodd–Frank Act as enacted into law includes several loopholes to the ban, allowing proprietary trading in certain circumstances. However, the regulations required to enforce these elements of the law were not implemented during 2013 and were under attack by bank lobbying efforts.

Another major banking regulation, the Glass–Steagall Act from 1933, was effectively repealed in 1999. The repeal allowed depository banks to enter into additional lines of business. Senators John McCain and Elizabeth Warren proposed bringing back Glass-Steagall during 2013.

Too big to fail tax

Economist Willem Buiter proposes a tax to internalize the massive costs inflicted by "too big to fail" institution. "When size creates externalities, do what you would do with any negative externality: tax it. The other way to limit size is to tax size. This can be done through capital requirements that are progressive in the size of the business (as measured by value added, the size of the balance sheet or some other metric). Such measures for preventing the New Darwinism of the survival of the fittest and the politically best connected should be distinguished from regulatory interventions based on the narrow leverage ratio aimed at regulating risk (regardless of size, except for a de minimis lower limit)."

Monitoring

On November 16, 2018, a policy research and development entity, called the Financial Stability Board, released a list of 29 banks worldwide that they considered "systemically important financial institutions"—financial organisations whose size and role meant that any failure could cause serious systemic problems. 

• Agricultural Bank of China
• Banco Santander
• Bank of America
• Bank of China
• Bank of New York Mellon
• Barclays
• BNP Paribas
• China Construction Bank
• Citigroup
• Crédit Agricole
• Credit Suisse
• Deutsche Bank
• Goldman Sachs
• Groupe BPCE
• HSBC
• Industrial and Commercial Bank of China Limited
• ING Bank
• JPMorgan Chase
• Mitsubishi UFJ Financial Group
• Mizuho Financial Group
• Morgan Stanley
• Royal Bank of Canada
• Société Générale
• Standard Chartered
• State Street Corporation
• Sumitomo Mitsui Financial Group
• UBS
• Unicredit Group
• Wells Fargo

Notable views on the issue

Economists

More than fifty notable economists, financial experts, bankers, finance industry groups, and banks themselves have called for breaking up large banks into smaller institutions.

Some economists such as Paul Krugman hold that economies of scale in banks and in other businesses are worth preserving, so long as they are well regulated in proportion to their economic clout, and therefore that "too big to fail" status can be acceptable. The global economic system must also deal with sovereign states being too big to fail. Krugman wrote in January 2010 that it was more important to reduce bank risk taking (leverage) than to break them up.

Economist Simon Johnson has advocated both increased regulation as well as breaking up the larger banks, not only to protect the financial system but to reduce the political power of the largest banks.

Politicians

One of the most vocal opponents in the United States government of the "too big to fail" status of large American financial institutions in recent years has been Elizabeth Warren. At her first U.S. Senate Banking Committee hearing on February 14, 2013, Senator Warren pressed several banking regulators to answer when they had last taken a Wall Street bank to trial and stated, "I'm really concerned that 'too big to fail' has become 'too big for trial'." Videos of Warren's questioning, centering on "too big to fail", became popular on the internet, amassing more than 1 million views in a matter of days.

On March 6, 2013, United States Attorney General Eric Holder told the Senate Judiciary Committee that the Justice Department faces difficulty charging large banks with crimes because of the risk to the economy. Four days later, Federal Reserve Bank of Dallas President Richard W. Fisher wrote in advance of a speech to the Conservative Political Action Conference that large banks should be broken up into smaller banks, and both Federal Deposit Insurance and Federal Reserve discount window access should end for large banks. Other conservatives including Thomas Hoenig, Ed Prescott, Glenn Hubbard, and David Vitter also advocated breaking up the largest banks.

International organizations

On April 10, 2013, International Monetary Fund Managing Director Christine Lagarde told the Economic Club of New York "too big to fail" banks had become "more dangerous than ever" and had to be controlled with "comprehensive and clear regulation [and] more intensive and intrusive supervision".

Other commentators

Ron Suskind claimed in his book Confidence Men that the administration of Barack Obama considered breaking up Citibank and other large banks that had been involved in the financial crisis of 2008. He said that Obama's staff, such as Timothy Geithner, refused to do so. The administration and Geithner have denied this version of events.

Mervyn King, the governor of the Bank of England during 2003–2013, called for cutting "too big to fail" banks down to size, as a solution to the problem of banks having taxpayer-funded guarantees for their speculative investment banking activities. "If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure."

Former Chancellor of the Exchequer Alistair Darling disagreed: "Many people talk about how to deal with the big banks – banks so important to the financial system that they cannot be allowed to fail, but the solution is not as simple, as some have suggested, as restricting the size of the banks". Additionally, Alan Greenspan said that "If they're too big to fail, they're too big", suggesting U.S. regulators to consider breaking up large financial institutions considered "too big to fail". He added, "I don't think merely raising the fees or capital on large institutions or taxing them is enough ... they'll absorb that, they'll work with that, and it's totally inefficient and they'll still be using the savings."

Public opinion polls

Gallup reported in June 2013 that: "Americans' confidence in U.S. banks increased to 26% in June, up from the record low of 21% the previous year. The percentage of Americans saying they have 'a great deal' or 'quite a lot' of confidence in U.S. banks is now at its highest point since June 2008, but remains well below its pre-recession level of 41%, measured in June 2007. Between 2007 and 2012, confidence in banks fell by half—20 percentage points." Gallup also reported that: "When Gallup first measured confidence in banks in 1979, 60% of Americans had a great deal or quite a lot of confidence in them—second only to the church. This high level of confidence, which hasn't been matched since, was likely the result of the strong U.S. banking system established after the 1930s Great Depression and the related efforts of banks and regulators to build Americans' confidence in that system."

Lobbying by banking industry

In the US, the banking industry spent over $100 million lobbying politicians and regulators between January 1 and June 30, 2011. Lobbying in the finance, insurance and real estate industries has risen annually since 1998 and was approximately $500 million in 2012.

Historical examples

Prior to the 2008 failure and bailout of multiple firms, there were "too big to fail" examples from 1763 when Leendert Pieter de Neufville in Amsterdam and Johann Ernst Gotzkowsky in Berlin failed, and from the 1980s and 1990s. These included Continental Illinois and Long-Term Capital Management.

Continental Illinois case

An early example of a bank rescued because it was "too big to fail" was the Continental Illinois National Bank and Trust Company during the 1980s.

Distress

The Continental Illinois National Bank and Trust Company experienced a fall in its overall asset quality during the early 1980s. Tight money, Mexico's default (1982) and plunging oil prices followed a period when the bank had aggressively pursued commercial lending business, Latin American syndicated loan business, and loan participation in the energy sector. Complicating matters further, the bank's funding mix was heavily dependent on large certificates of deposit and foreign money markets, which meant its depositors were more risk-averse than average retail depositors in the US.

Payments crisis

The bank held significant participation in highly speculative oil and gas loans of Oklahoma's Penn Square Bank.^[76] When Penn Square failed in July 1982, the Continental's distress became acute, culminating with press rumors of failure and an investor-and-depositor run in early May 1984. In the first week of the run, the Fed permitted the Continental Illinois discount window credits on the order of $3.6 billion. Still in significant distress, the management obtained a further $4.5 billion in credits from a syndicate of money center banks the following week. These measures failed to stop the run, and regulators were confronted with a crisis.

Regulatory crisis

The seventh-largest bank in the nation by deposits would very shortly be unable to meet its obligations. Regulators faced a tough decision about how to resolve the matter. Of the three options available, only two were seriously considered. Even banks much smaller than the Continental were deemed unsuitable for resolution by liquidation, owing to the disruptions this would have inevitably caused. The normal course would be to seek a purchaser (and indeed press accounts that such a search was underway contributed to Continental depositors' fears in 1984). However, in the tight-money financial climate of the early 1980s, no purchaser was forthcoming.

Besides generic concerns of size, contagion of depositor panic and bank distress, regulators feared the significant disruption of national payment and settlement systems. Of special concern was the wide network of correspondent banks with high percentages of their capital invested in the Continental Illinois. Essentially, the bank was deemed "too big to fail", and the "provide assistance" option was reluctantly taken. The dilemma then became how to provide assistance without significantly unbalancing the nation's banking system.

Stopping the run

To prevent immediate failure, the Federal Reserve announced categorically that it would meet any liquidity needs the Continental might have, while the Federal Deposit Insurance Corporation (FDIC) gave depositors and general creditors a full guarantee (not subject to the $100,000 FDIC deposit-insurance limit) and provided direct assistance of $2 billion (including participations). Money center banks assembled an additional $5.3 billion unsecured facility pending a resolution and resumption of more-normal business. These measures slowed, but did not stop, the outflow of deposits.

Controversy

In a United States Senate hearing afterwards, the then Comptroller of the Currency C. T. Conover defended his position by admitting the regulators will not let the largest 11 banks fail.

Long-Term Capital Management

Long-Term Capital Management L.P. (LTCM) was a hedge fund management firm based in Greenwich, Connecticut that utilized absolute-return trading strategies combined with high financial leverage. The firm's master hedge fund, Long-Term Capital Portfolio L.P., collapsed in the late 1990s, leading to an agreement on September 23, 1998 among 14 financial institutions for a $3.6 billion recapitalization (bailout) under the supervision of the Federal Reserve.

LTCM was founded in 1994 by John W. Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM's board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a "new method to determine the value of derivatives". Initially successful with annualized returns of over 40% (after fees) in its first years, in 1998 it lost $4.6 billion in less than four months following the Russian financial crisis requiring financial intervention by the Federal Reserve, with the fund liquidating and dissolving in early 2000.

International

Canada

In March 2013, the Office of the Superintendent of Financial Institutions announced that Canada's six largest banks, the Bank of Montreal, the Bank of Nova Scotia, the Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada and Toronto-Dominion Bank, were too big to fail. Those six banks accounted for 90% of banking assets in Canada at that time. It noted that "the differences among the largest banks are smaller if only domestic assets are considered, and relative importance declines rapidly after the top five banks and after the sixth bank (National)."

New Zealand

Despite the government's assurances, opposition parties and some media commentators in New Zealand say that the largest banks are too big to fail and have an implicit government guarantee.

United Kingdom

George Osborne, Chancellor of the Exchequer under David Cameron (2010–2016), threatened to break up banks which are too big to fail.

The too-big-to-fail idea has led to legislators and governments facing the challenge of limiting the scope of these hugely important organisations, and regulating activities perceived as risky or speculative—to achieve this regulation in the UK, banks are advised to follow the UK's Independent Commission on Banking Report.

Capitalist mode of production (Marxist theory)

From Wikipedia, the free encyclopedia

 

In Karl Marx's critique of political economy and subsequent Marxian analyses, the capitalist mode of production refers to the systems of organizing production and distribution within capitalist societies. Private money-making in various forms (renting, banking, merchant trade, production for profit and so on) preceded the development of the capitalist mode of production as such. The capitalist mode of production proper, based on wage-labour and private ownership of the means of production and on industrial technology, began to grow rapidly in Western Europe from the Industrial Revolution, later extending to most of the world.

The capitalist mode of production is characterized by private ownership of the means of production, extraction of surplus value by the owning class for the purpose of capital accumulation, wage-based labour and—at least as far as commodities are concerned—being market-based.

Synopsis

A "mode of production" (German: Produktionsweise) means simply "the distinctive way of producing", which could be defined in terms of how it is socially organized and what kinds of technologies and tools are used. Under the capitalist mode of production:

• Both the inputs and outputs of production are mainly privately owned, priced goods and services purchased in the market.
• Production is carried out for exchange and circulation in the market, aiming to obtain a net profit income from it.
• The owners of the means of production (capitalists) are the dominant class (bourgeoisie) who derive their income from the surplus product produced by the workers and appropriated freely by the capitalists.
• A defining feature of capitalism is the dependency on wage-labor for a large segment of the population; specifically, the working class (proletariat) do not own capital and must live by selling their labour power in exchange for a wage.

The capitalist mode of production may exist within societies with differing political systems (e.g. liberal democracy, social democracy, fascism, Communist state and Czarism) and alongside different social structures such as tribalism, the caste system, an agrarian-based peasant society, urban industrial society and post-industrialism. Although capitalism has existed in the form of merchant activity, banking, renting land and small-scale manufactures in previous stages of history, it was usually a relatively minor activity and secondary to the dominant forms of social organization and production with the prevailing property system keeping commerce within clear limits.

Distinguishing characteristics

Capitalist society is epitomized by the so-called circuit of commodity production, M-C-M' and by renting money for that purpose where the aggregate of market actors determine the money price M, of the input labor and commodities and M' the struck price of C, the produced market commodity. It is centered on the process M → M', "making money" and the exchange of value that occurs at that point. M' > M is the condition of rationality in the capitalist system and a necessary condition for the next cycle of accumulation/production. For this reason, Capitalism is "production for exchange" driven by the desire for personal accumulation of money receipts in such exchanges, mediated by free markets. The markets themselves are driven by the needs and wants of consumers and those of society as a whole in the form of the bourgeois state. These wants and needs would (in the socialist or communist society envisioned by Marx, Engels and others) be the driving force, it would be "production for use". Contemporary mainstream (bourgeois) economics, particularly that associated with the right, holds that an "invisible hand", through little more than the freedom of the market, is able to match social production to these needs and desires.

"Capitalism" as this money-making activity has existed in the shape of merchants and money-lenders who acted as intermediaries between consumers and producers engaging in simple commodity production (hence the reference to "merchant capitalism") since the beginnings of civilization. What is specific about the “capitalist mode of production” is that most of the inputs and outputs of production are supplied through the market (i.e. they are commodities) and essentially all production is in this mode. For example, in flourishing feudalism most or all of the factors of production including labor are owned by the feudal ruling class outright and the products may also be consumed without a market of any kind, it is production for use within the feudal social unit and for limited trade.

This has the important consequence that the whole organization of the production process is reshaped and reorganized to conform with economic rationality as bounded by capitalism, which is expressed in price relationships between inputs and outputs (wages, non-labor factor costs, sales, profits) rather than the larger rational context faced by society overall. That is, the whole process is organized and reshaped in order to conform to "commercial logic". Another way of saying this is that capital accumulation defines economic rationality in capitalist production. In the flourishing period of capitalism, these are not operating at cross purposes and thus capitalism acts as a progressive force (e.g. against feudalism). In the final stages, capitalism as a mode of production achieves complete domination on a planetary basis and has nothing to overcome but itself, the final (for it, capitalism, viewed as a Hegelian process, not for historical development per se) negating of the negation posited by orthodox Marxism. 

In this context, Marx refers to a transition from the “formal subsumption” of production under the power of capital to the “real subsumption” of production under the power of capital. In what he calls the "specifically capitalist mode of production", both the technology worked with and the social organization of labour have been completely refashioned and reshaped in a commercial (profit and market-oriented) way—the "old ways of producing" (for example, crafts and cottage industries) had been completely displaced by the then new industrialism. Some historians, such as Jairus Banaji and Nicholas Vrousalis have argued that capitalist relations of production predate the capitalist mode of production.

Summary of basic distinctions

In general, capitalism as an economic system and mode of production can be summarized by the following:

• Capital accumulation: production for profit and accumulation as the implicit purpose of all or most of production, constriction or elimination of production formerly carried out on a common social or private household basis.
• Commodity production: production for exchange on a market; to maximize exchange-value instead of use-value.
• Private ownership of the means of production: ownership of the means of production by a class of capital owners, either individually, collectively (see corporation) or through a state that serves the interests of the capitalist class.
• Primacy of wage labor: near universality of wage labor, whether so-called or not, with coerced work for the masses in excess of what they would need to sustain themselves and a complete saturation of bourgeois values at all levels of society from the base reshaping and reorganization described above.

Origins

Marx argued that capital existed incipiently on a small scale for centuries in the form of merchant, renting and lending activities and occasionally also as small-scale industry with some wage labour (Marx was also well aware that wage labour existed for centuries on a modest scale before the advent of capitalist industry). Simple commodity exchange and consequently simple commodity production, which form the initial basis for the growth of capital from trade, have a very long history. The "capitalistic era" according to Marx dates from the 16th century, i.e. it began with merchant capitalism and relatively small urban workshops.

For the capitalist mode of production to emerge as a distinctive mode of production dominating the whole production process of society, many different social, economic, cultural, technical and legal-political conditions had to come together.

For most of human history, these did not come together. Capital existed and commercial trade existed, but it did not lead to industrialisation and large-scale capitalist industry. That required a whole series of new conditions, namely specific technologies of mass production, the ability to independently and privately own and trade in means of production, a class of workers compelled to sell their labor power for a living, a legal framework promoting commerce, a physical infrastructure making the circulation of goods on a large scale possible, security for private accumulation and so on. In many Third World countries, many of these conditions do not exist even today even though there is plenty of capital and labour available—the obstacles for the development of capitalist markets are less a technical matter and more a social, cultural and political problem.

A society, a region or nation is “capitalist” if the predominant source of incomes and products being distributed is capitalist activity—even so, this does not yet mean necessarily that the capitalist mode of production is dominant in that society.

Defining structural criteria

Marx never provided a complete definition of the capitalist mode of production as a short summary, although in his manuscripts he sometimes attempted one.

In a sense, it is Marx's three-volume work Capital (1867–1894; sometimes known by its German title, Das Kapital), as a whole that provides his "definition" of the capitalist mode of production. Nevertheless, it is possible to summarise the essential defining characteristics of the capitalist mode of production as follows:

• The means of production (or capital goods) and the means of consumption (or consumer goods) are mainly produced for market sale; output is produced with the intention of sale in an open market; and only through sale of output can the owner of capital claim part of the surplus-product of human labour and realize profits. Equally, the inputs of production are supplied through the market as commodities. The prices of both inputs and outputs are mainly governed by the market laws of supply and demand (and ultimately by the law of value). In short, a capitalist must use money to fuel both the means of production and labor in order to make commodities. These commodities are then sold to the market for a profit. The profit once again becomes part of a larger amount of capital which the capitalist reinvests to make more commodities and ultimately more and more capital.
• Private ownership of the means of production ("private enterprise") as effective private control and/or legally enforced ownership, with the consequence that investment and management decisions are made by private owners of capital who act autonomously from each other and—because of business secrecy and the constraints of competition—do not co-ordinate their activities according to collective, conscious planning. Enterprises are able to set their own output prices within the framework of the forces of supply and demand manifested through the market and the development of production technology is guided by profitability criteria.
• The corollary of that is wage labour ("employment") by the direct producers, who are compelled to sell their labour power because they lack access to alternative means of subsistence (other than being self-employed or employers of labour, if only they could acquire sufficient funds) and can obtain means of consumption only through market transactions. These wage earners are mostly "free" in a double sense: they are “freed” from ownership of productive assets and they are free to choose their employer.
• Being carried out for market on the basis of a proliferation of fragmented decision-making processes by owners and managers of private capital, social production is mediated by competition for asset-ownership, political or economic influence, costs, sales, prices and profits. Competition occurs between owners of capital for profits, assets and markets; between owners of capital and workers over wages and conditions; and between workers themselves over employment opportunities and civil rights.
• The overall aim of capitalist production under competitive pressure is (a) to maximise net profit income (or realise a net superprofit) as much as possible through cutting production costs, increasing sales and monopolisation of markets and supply; (b) capital accumulation, to acquire productive and non-productive assets; and (c) to privatize both the supply of goods and services and their consumption. The larger portion of the surplus product of labor must usually be reinvested in production since output growth and accumulation of capital mutually depend on each other.
• Out of preceding characteristics of the capitalist mode of production, the basic class structure of this mode of production society emerges: a class of owners and managers of private capital assets in industries and on the land, a class of wage and salary earners, a permanent reserve army of labour consisting of unemployed people and various intermediate classes such as the self-employed (small business and farmers) and the “new middle classes” (educated or skilled professionals on higher salaries).
• The finance of the capitalist state is heavily dependent on levying taxes from the population and on credit—that is, the capitalist state normally lacks any autonomous economic basis (such as state-owned industries or landholdings) that would guarantee sufficient income to sustain state activities. The capitalist state defines a legal framework for commerce, civil society and politics, which specifies public and private rights and duties as well as legitimate property relations.
• Capitalist development, occurring on private initiative in a socially unco-ordinated and unplanned way, features periodic crises of over-production (or excess capacity). This means that a critical fraction of output cannot be sold at all, or cannot be sold at prices realising the previously ruling rate of profit. The other side of over-production is the over-accumulation of productive capital: more capital is invested in production than can obtain a normal profit. The consequence is a recession (a reduced economic growth rate) or in severe cases, a depression (negative real growth, i.e. an absolute decline in output). As a corollary, mass unemployment occurs. In the history of capitalist development since 1820, there have been more than 20 of such crises—nowadays the under-utilisation of installed productive capacity is a permanent characteristic of capitalist production (average capacity utilisation rates nowadays normally range from about 60% to 85%).

In examining particular manifestations of the capitalist mode of production in particular regions and epochs, it is possible to find exceptions to these main defining criteria, but the exceptions prove the rule in the sense that over time the exceptional circumstances tend to disappear.

State capitalist interpretation

As mentioned, Marx never explicitly summarised his definition of capitalism, beyond some suggestive comments in manuscripts which he did not publish himself. This has led to controversies among Marxists about how to evaluate the "capitalist" nature of society in particular countries. Supporters of theories of state capitalism such as the International Socialists reject the definition of the capitalist mode of production given above. In their view, claimed to be more revolutionary (in that true liberation from capitalism must be the self-emancipation of the working class—"socialism from below"), what really defines the capitalist mode of production is:

• Means of production which dominate the direct producers as an alien power.
• The existence of a wage-earning working class which does not hold or have power.
• The existence of an elite or ruling class which controls the country, exploiting the working population in the technical Marxist sense.

If true, then ownership relations generally and private ownership in particular are irrelevant to the definition of capitalism. The existence of commercial relations and commodity production are also irrelevant.

Many of the state capitalist theories (which actually originated in Germany, where they were already criticised by Frederick Engels) define "capital" only as a social relation of power and exploitation.

This idea is based on some passages from Marx, where Marx emphasized that capital cannot exist except within a power-relationship between social classes which governs the extraction of surplus-labour. It is this power-relationship that is most important for the proponents of theories of state capitalism—everything else is secondary.

Heterodox views and polemics

Orthodox Marxist debate after 1917 has often been in Russian, other East European languages, Vietnamese, Korean or Chinese and dissidents seeking to analyze their own country independently were typically silenced in one way or another by the regime, therefore the political debate has been mainly from a Western point of view and based on secondary sources, rather than being based directly on the experiences of people living in "actually existing socialist countries". That debate has typically counterposed a socialist ideal to a poorly understood reality, i.e. using analysis which due to such party stultification and shortcomings of the various parties fails to apply the full rigor of the dialectical method to a well informed understanding of such actual conditions in situ and falls back on trite party approved formulae. In turn, this has led to the accusation that Marxists cannot satisfactorily specify what capitalism and socialism really are, nor how to get from one to the other—quite apart from failing to explain satisfactorily why socialist revolutions failed to produce the desirable kind of socialism. Behind this problem, it is argued the following:

• A kind of historicism according to which Marxists have a privileged insight into the "march of history"—the doctrine is thought to provide the truth, in advance of real research and experience. Evidence contrary to the doctrine is rejected or overlooked.
• A uni-linear view of history, according to which feudalism leads to capitalism and capitalism to socialism.
• An attempt to fit the histories of different societies into this schema of history on the basis that if they are not socialist, they must be capitalist (or vice versa), or if they are neither, that they must be in transition from one to the other.

None of these stratagems, it is argued, are either warranted by the facts or scientifically sound and the result is that many socialists have abandoned the rigid constraints of Marxist orthodoxy in order to analyse capitalist and non-capitalist societies in a new way.

From an orthodox Marxist perspective, the former is simple ignorance and or purposeful obfuscation of works such as Jean-Paul Sartre's Critique of Dialectical Reason and a broader literature which does in fact supply such specifications. The latter are partly superficial complaints which can easily be refuted as they are diametrically opposite of well known statements by Marx, Lenin, Trotsky and others, part pettifogging and redundant restatement of the same thing and partly true observations of inferior and simplistic presentations of Marxist thought (by those espousing some brand of Marxism). Neither historical or dialectical materialism assert or imply a "uni-linear" view of human development, although Marxism does claim a general and indeed accelerating secular trend of advancement, driven in the modern period by capitalism. Similarly, Marxists, especially in the period after 1917, have on the contrary been especially mindful of the so-called unequal and uneven development and its importance in the struggle to achieve socialism. Likewise, the pushback on Marxism's claim to be a science is partly justified and partly a scientism: as a social science, Marxism stands on better philosophical foundations than many of the so-called hard sciences [DJS -- ??], let alone the other social sciences. Finally, in the wake of the disasters of socialism in the previous century most modern Marxists are at great pains to stipulate that only the independently acting working class can determine the nature of the society it creates for itself so the call for a prescriptive description of exactly what that society would be like and how it is to emerge from the existing class-ridden one, other than by the conscious struggle of the masses, is an unwitting expression of precisely the problem that is supposed to be being addressed (the imposition of social structure by elites).

Nadir of American race relations

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Nadir_of_American_race_relations 

 

Nadir of American race relations

Famous "A man was lynched yesterday" flag used in protest by the NAACP.
Date	1887 to early 1900s (1901 or 1923 ,disputed)
Location	United States
Cause	Failures of the Reconstruction Era Economic competition in the North
Outcome	Great migration of African Americans

According to historian Rayford Logan, the nadir of American race relations was the period in the history of the United States from the end of Reconstruction in 1877 through the early 20th century, when racism in the country was worse than in any other period in the nation's history. During this period, African Americans lost many civil rights gained during Reconstruction. Anti-black violence, lynchings, segregation, legal racial discrimination, and expressions of white supremacy increased.

Logan coined the phrase in his 1954 book The Negro in American Life and Thought: The Nadir, 1877–1901. Logan tried to determine the year when "the Negro's status in American society" reached its lowest point. He argued for 1901, suggesting that relations improved after that; however, others such as John Hope Franklin and Henry Arthur Callis, argued for dates as late as 1923.

The term continues to be used, most notably in books by James Loewen, but it is also used by other scholars. Loewen chooses later dates, arguing that the post-Reconstruction era was in fact one of widespread hope for racial equity due to idealistic Northern support for civil rights. In Loewen's view the true nadir only began when Northern Republicans ceased supporting Southern blacks' rights around 1890, and it lasted until the Second World War. This period followed the financial Panic of 1873 and a continuing decline in cotton prices. It overlapped with both the Gilded Age and the Progressive Era, and was characterized by the nationwide sundown town phenomenon.

Logan's focus was exclusively on African Americans in the American South. But the time period which he identified also represents the worst period of anti-Chinese discrimination, harassment, and violence on the west coast of the U.S. (and Canada), particularly after the Chinese Exclusion Act of 1882.

Background

Reconstruction revisionism

In the early part of the 20th century, some white historians put forth the concept of Reconstruction as a tragic period, when Republicans motivated by revenge and profit used troops to force Southerners to accept corrupt governments run by unscrupulous Northerners and unqualified blacks. Such scholars generally dismissed the idea that blacks could ever be capable of governing.

Notable proponents of this view were referred to as the Dunning School, named after influential Columbia historian William Archibald Dunning. Another Columbia professor, John Burgess, famously wrote that "black skin means membership in a race of men which has never of itself... created any civilization of any kind."

The Dunning School's view of Reconstruction held sway for years. It was represented in D. W. Griffith's popular movie The Birth of a Nation (1915) and to some extent in Margaret Mitchell's novel Gone with the Wind (1934). More recent historians of the period have rejected many of the Dunning School's conclusions, and offer a different assessment.

History of Reconstruction

Hiram Revels, the first African American Senator, elected in 1870 from Mississippi. One other black Senator, Blanche K. Bruce, was elected from the same state in 1874.

Today's consensus regards Reconstruction as a time of idealism and hope, with some practical achievements. The Radical Republicans who passed the Fourteenth and Fifteenth Amendments were, for the most part, motivated by a desire to help freedmen. African-American historian W. E. B. Du Bois put this view forward in 1910, and later historians Kenneth Stampp and Eric Foner expanded it. The Republican Reconstruction governments had their share of corruption, but they benefited many whites, and were no more corrupt than Democratic governments or, indeed, Northern Republican governments.

Furthermore, the Reconstruction governments established public education and social welfare institutions for the first time, improving education for both blacks and whites, and tried to improve social conditions for the many left in poverty after the long war. No Reconstruction state government was dominated by blacks; in fact, blacks did not attain a level of representation equal to their population in any state.

Origins

Reconstruction era violence

"And Not This Man?", Harper's Weekly, August 5, 1865. Thomas Nast drew this cartoon; in 1865 he, like many Northerners, remembered blacks' military service and favored granting them voting rights

 

For several years after the war, the federal government, pushed by Northern opinion, showed itself willing to intervene to protect the rights of black Americans. There were limits, however, to Republican efforts on behalf of blacks: in Washington, a proposal of land reform made by the Freedmen's Bureau which would have granted blacks plots on the plantation land (forty acres and a mule) they worked never came to pass. In the South, many former Confederates were stripped of the right to vote, but they resisted Reconstruction with violence and intimidation. James Loewen notes that between 1865 and 1867, when white Democrats controlled the government, whites murdered an average of one black person every day in Hinds County, Mississippi. Black schools were especially targeted: school buildings were frequently burned and teachers were flogged and occasionally murdered. The postwar terrorist group the Ku Klux Klan (KKK) acted with significant local support, attacking freedmen and their white allies; the group was largely suppressed by federal efforts under the Enforcement Acts of 1870–71, but did not disappear and had a resurgence in the early twentieth century.

Despite these failures, however, blacks continued to vote and attend schools. Literacy soared, and many African-Americans were elected to local and statewide offices, with several serving in Congress. Because of the black community's commitment to education, the majority of blacks were literate by 1900. 

"Colored Rule in a Reconstructed(?) State", Harper's Weekly, March 14, 1874. Nine years later, Nast had given up on racial idealism. He caricatured black legislators as incompetent buffoons

Continued violence in the South, especially heated around electoral campaigns, sapped Northern intentions. More significantly, after the long years and losses of the Civil War, Northerners had lost heart for the massive commitment of money and arms that would have been required to stifle the white insurgency. The financial panic of 1873 disrupted the economy nationwide, causing more difficulties. The white insurgency took on new life ten years after the war. Conservative white Democrats waged an increasingly violent campaign, with the Colfax and Coushatta Massacres in Louisiana in 1873 as signs. The next year saw the formation of paramilitary groups, such as the White League in Louisiana (1874) and Red Shirts in Mississippi and the Carolinas, that worked openly to turn Republicans out of office, disrupt black organizing, and intimidate and suppress black voting. They invited press coverage. One historian described them as "the military arm of the Democratic Party."

In 1874, in a continuation of the disputed gubernatorial election of 1872, thousands of White League militiamen fought against New Orleans police and Louisiana state militia and won. They turned out the Republican governor and installed the Democrat Samuel D. McEnery, took over the capitol, state house and armory for a few days, and then retreated in the face of Federal troops. This was known as the "Battle of Liberty Place".

End of Reconstruction

Northerners waffled and finally capitulated to the South, giving up on being able to control election violence. Abolitionist leaders like Horace Greeley began to ally themselves with Democrats in attacking Reconstruction governments. By 1875, there was a Democratic majority in the House of Representatives. President Ulysses S. Grant, who as a general had led the Union to victory in the Civil War, initially refused to send troops to Mississippi in 1875 when the governor of the state asked him to. Violence surrounded the presidential election of 1876 in many areas, beginning a trend. After Grant, it would be many years before any President would do anything to extend the protection of the law to black people.

Jim Crow and terrorism

White supremacy

As noted above, white paramilitary forces contributed to whites' taking over power in the late 1870s. A brief coalition of populists took over in some states, but conservative Democrats had returned to power after the 1880s. From 1890 to 1908, they proceeded to pass legislation and constitutional amendments to disenfranchise most blacks and many poor whites, with Mississippi and Louisiana creating new state constitutions in 1890 and 1895 respectively, to disenfranchise African Americans. Democrats used a combination of restrictions on voter registration and voting methods, such as poll taxes, literacy and residency requirements, and ballot box changes. The main push came from elite Democrats in the Solid South, where blacks were a majority of voters. The elite Democrats also acted to disenfranchise poor whites. African Americans were an absolute majority of the population in Louisiana, Mississippi and South Carolina, and represented more than 40% of the population in four other former Confederate states. Accordingly, many whites perceived African Americans as a major political threat, because in free and fair elections, they would hold the balance of power in a majority of the South. South Carolina U.S. Senator Ben Tillman proudly proclaimed in 1900, "We have done our level best [to prevent blacks from voting]... we have scratched our heads to find out how we could eliminate the last one of them. We stuffed ballot boxes. We shot them. We are not ashamed of it."

Conservative white Democratic governments passed Jim Crow legislation, creating a system of legal racial segregation in public and private facilities. Blacks were separated in schools and the few hospitals, were restricted in seating on trains, and had to use separate sections in some restaurants and public transportation systems. They were often barred from some stores, or forbidden to use lunchrooms, restrooms and fitting rooms. Because they could not vote, they could not serve on juries, which meant they had little if any legal recourse in the system. Between 1889 and 1922, as political disenfranchisement and segregation were being established, the National Association for the Advancement of Colored People (NAACP) calculates lynchings reached their worst level in history. Almost 3,500 people fell victim to lynching, almost all of them black men.

Lynchings

Historian James Loewen notes that lynching emphasized the powerlessness of blacks: "the defining characteristic of a lynching is that the murder takes place in public, so everyone knows who did it, yet the crime goes unpunished." Ostensibly prompted by black attacks or threats to white women, scholars and journalists have shown that lynchings arose out of economic competition and desire by competing whites for social control. African American civil rights activist Ida B. Wells-Barnett conducted one of the first systematic studies of the subject. She found blacks were "lynched for anything or nothing" – for wife-beating, stealing hogs, being "saucy to white people", sleeping with a consenting white woman – for being in the wrong place at the wrong time. It was a system of social terrorism.

Blacks who were economically successful faced reprisals or sanctions. When Richard Wright tried to train to become an optometrist and lens-grinder, the other men in the shop threatened him until he was forced to leave. In 1911 blacks were barred from participating in the Kentucky Derby because African Americans won more than half of the first twenty-eight races. Through violence and legal restrictions, whites often prevented blacks from working as common laborers, much less as skilled artisans or in the professions. Under such conditions, even the most ambitious and talented black people found it extremely difficult to advance.

This situation called into question the views of Booker T. Washington, the most prominent black leader during the early part of the nadir. He had argued that black people could better themselves by hard work and thrift. He believed they had to master basic work before going on to college careers and professional aspirations. Washington believed his programs trained blacks for the lives they were likely to lead and the jobs they could get in the South.

However, as W. E. B. Du Bois pointed out,

it is utterly impossible, under modern competitive methods, for working men and property-owners to defend their rights and exist without the right of suffrage.

Washington had always (though often clandestinely) supported the right of black suffrage, and had fought against disfranchisement laws in Georgia, Louisiana, and other Southern states. This included secretive funding of litigation resulting in Giles v. Harris, 189 U.S. 475 (1903), which lost due to Supreme Court reluctance to interfere with states' rights.

Great migration

African-American migration

Many blacks voted with their feet and left the South to seek better conditions. In 1879, Logan notes, "some 40,000 Negroes virtually stampeded from Mississippi, Louisiana, Alabama, and Georgia for the Midwest." More significantly, beginning about 1915, many blacks moved to Northern cities in what became known as the Great Migration. Through the 1930s, more than 1.5 million blacks would leave the South for lives in the North, seeking work and the chance to escape lynchings and legal segregation. While they faced difficulties, overall they had better chances in the North. They had to make great cultural changes, as most went from rural areas to major industrial cities, and had to adjust from being rural workers to being urban workers. As an example, in its years of expansion, the Pennsylvania Railroad recruited tens of thousands of workers from the South. In the South, alarmed whites, worried that their labor force was leaving, often tried to block black migration.

Northern hostility

During the nadir, Northern areas struggled with upheaval and hostility. In the Midwest and West, many towns posted "sundown" warnings, threatening to kill African Americans who remained overnight. These "Sundown" towns also expelled African-Americans who had settled in those towns during Reconstruction and before. Monuments to Confederate War dead were erected across the nation – in Montana, for example.

Black housing was often segregated in the North. There was competition for jobs and housing as blacks entered cities which were also the destination of millions of immigrants from eastern and southern Europe. As more blacks moved north, they encountered racism where they had to battle over territory, often against ethnic Irish, who were defending their power base. In some regions, blacks could not serve on juries. Blackface shows, in which whites dressed as blacks portrayed African Americans as ignorant clowns, were popular in North and South. The Supreme Court reflected conservative tendencies and did not overrule Southern constitutional changes resulting in disfranchisement. In 1896, the Court ruled in Plessy v. Ferguson that "separate but equal" facilities for blacks were constitutional; the Court was made up almost entirely of Northerners. However, equal facilities were rarely provided, as there was no state or federal legislation requiring them. It would not be until 58 years later, with Brown v. Board of Education (1954), that the Court recognized its 1896 error.

While there were critics in the scientific community such as Franz Boas, eugenics and scientific racism were promoted in academia by scientists Lothrop Stoddard and Madison Grant, who argued "scientific evidence" for the racial superiority of whites and thereby worked to justify racial segregation and second-class citizenship for blacks.

National hostility

Ku Klux Klan

Numerous blacks had voted for Democrat Woodrow Wilson in the 1912 election, based on his promise to work for them. Instead, he segregated government workplaces and employment in some agencies. The first feature-length film, The Birth of a Nation (1915), which celebrated the original Ku Klux Klan, was shown at the White House to President Wilson and his cabinet members.

A quote from Woodrow Wilson used in "Birth of a Nation".

 

The Birth of a Nation resulted in the rebirth of the Klan, which in the 1920s had more power and influence than the original Klan ever did. In 1924, the Klan had four million members. It also controlled the governorship and a majority of the state legislature in Indiana, and exerted a powerful political influence in Arkansas, Oklahoma, California, Georgia, Oregon, and Texas.

Mob violence

In the years during and after World War I there were great social tensions in the nation. In addition to the Great Migration and immigration from Europe, African-American Army veterans, newly demobilized, sought jobs, and as trained soldiers, were less likely to acquiesce to discrimination. Mass attacks on blacks that developed out of strikes and economic competition occurred in Houston, Philadelphia, and East St. Louis in 1917.

In 1919 there were riots in several major cities, so many so that the summer of 1919 is known as Red Summer. The Chicago Race Riot of 1919 erupted into mob violence for several days. It left 15 whites and 23 blacks dead, over 500 injured and more than 1,000 homeless. An investigation found that ethnic Irish, who had established their own power base earlier on the South Side, were heavily implicated in the riots. The 1921 Tulsa Race Riot in Tulsa, Oklahoma, was even more deadly; white mobs invaded and burned the Greenwood district of Tulsa; 1,256 homes were destroyed and 39 people (26 black, 13 white) were confirmed killed, although recent investigations suggest that the number of black deaths could be considerably higher.

Legacy

Culture

Black literacy levels, which rose during Reconstruction, continued to increase through this period. The NAACP was established in 1909, and by 1920 the group won a few important anti-discrimination lawsuits. African Americans, such as Du Bois and Wells-Barnett, continued the tradition of advocacy, organizing, and journalism which helped spur abolitionism, and also developed new tactics that helped to spur the Civil Rights Movement of the 1950s and 1960s. The Harlem Renaissance and the popularity of jazz music during the early part of the 20th century made many Americans more aware of black culture and more accepting of black celebrities.

Instability

Overall, however, the nadir was a disaster, certainly for black people and arguably for whites as well. Foner points out:

...by the early twentieth century [racism] had become more deeply embedded in the nation's culture and politics than at any time since the beginning of the antislavery crusade and perhaps in our nation's entire history.

Similarly, Loewen argues that the family instability and crime which many sociologists have found in black communities can be traced, not to slavery, but to the nadir and its aftermath.

Foner noted that "none of Reconstruction's black officials created a family political dynasty" and concluded that the nadir "aborted the development of the South's black political leadership."