Rather than reviving the centralized Bank of the United States though, the Republicans opted for a different approach. It centered on the Legal Tender Act of 1862, which created a uniform paper money known as “the Greenback,” named after the color of the ink on the back of the bills. This money, backed by federal debt, was issued by the Treasury Department itself rather than by local banks, and could be used to pay taxes and fund new investments, especially in infrastructure development. This was followed by the National Banking Acts of 1863 and 1864, which created a national system by re-chartering many existing banks. In exchange, these banks were required to buy long-term U.S. Treasury bonds (backed by taxes and tariffs) and then deposit them with the Treasury Department as a security. The Treasury Department, in turn, issued greenbacks for the banks to circulate. In addition, the acts created the Comptroller of the Currency to regulate this new system.

In the end, this initiative brought the nation’s previously chaotic banking system under relative control and pumped much needed money in various localities. As Robert D. Hormats summarized in Harvard Business Review, reformers were successful in “pushing for legislation that created a decentralized but federally regulated national banking system.”

The early Republicans under Lincoln understood the positive role that government could play in developing and strengthening a nation’s economy. As Lincoln argued in his 1861 Independence Day speech to Congress, the “leading object [of government] is to elevate the condition of men; to lift artificial weights from all shoulders; to clear the paths of laudable pursuit for all; to afford all an unfettered start and a fair chance in the race of life.” By the Centennial Exposition in 1876, the results of American reform policies and innovation were apparent: the Sholes and Glidden typewriter, Alexander Graham Bell’s telephone, Thomas Edison’s phonograph, Cyrus McCormick’s reaper. The inventions, and others, were physical manifestations of what Lincoln spoke of. They were made possible by government creating the right conditions for industry and proper competition, and opened the way to a brighter future for all.

IN THE early 1900s, even before the Great Depression, America was unstable—far more than most today would like to remember. This was, at least since the end of World War I, the era of political absolutism: nations across the breadth of Europe fell to dictatorship of one ideological stripe or another. Like today, there was a collapse in the belief that democracy could survive as a system of government. An editorial at the time for The Christian Century stated that “the hope of democracy will revive when it learns how to do the things that need to be done as efficiently as autocracy does them.”

These views could be found in the highest reaches of government, even in the military. Walter Lippmann, one of President Woodrow Wilson’s advisors, wrote a 1925 book entitled The Phantom Public which argued that democracy was unviable. A U.S. Army Training Manual from 1928 asserted that democracy leads to “demogogism, license, agitation, discontent, anarchy.” Wilson’s presidency was characterized as “an era of lawless and disorderly defense of law and order, of unconstitutional defense of the Constitution, of suspicion and civil conflict—in a very literal sense a reign of terror.” Three-time Treasury Secretary Andrew Mellon and numerous U.S. business leaders praised Benito Mussolini, saying that in Italy “the Bolshevik menace was met and vanquished;” that Il Duce had not only rescued his country “from any possible danger of economic and social collapse,” but had “improved the well-being of the people and of the country,” since it “operated in accordance with established economic laws.” Meanwhile, the Germanophile president of Columbia University, Nicholas Murray Butler, instructed his freshman class that totalitarian governments produced “men of far greater intelligence, far stronger character, and far more courage than the system of elections.”

Then there was the economy. Matt Stoller, author of Goliath: The 100-Year War Between Monopoly Power and Democracy, observes that the end of World War I resulted in the empowerment and concentration of financial and industrial interests. “The war induced so much demand for steel, coal, oil, explosives, aluminum, and credit that big business came out stronger at the end than the beginning.” Andrew Mellon stands out as emblematic of the era: a banking and industrialist mogul, and owner of various Fortune 500 companies, who was appointed to run the U.S. government’s finances while still in control of his business empire. With government in the hands of men such as Mellon, socio-economic inequality exploded and financial interests ran rampant lacking any form of restraint. Stoller paints a vivid picture:

By 1928, the top one percent of the population received a quarter of all the income. This excess income flooded into the stock market, and into speculation. At the same time, the Federal Reserve, which was created by Wilson to give the public control over banking, was instead controlled by shortsighted private bankers who could not or would not stop speculative bubbles. It was a dangerously unstable system.

That system “broke” with the Wall Street Crash in 1929, which spread to the banking system (which had lent heavily to speculators), leading to a wave of defaults and bank closures. Fewer banks meant less credit, less lending, and less economic activity, leading to more business defaults and thus even more bank closures, and so on. Washington was clueless as to what to do. Poverty and desperation led to unrest and political radicalism. The Communist Party saw a surge in membership and marched on factories, while the U.S. military prepared contingency plans in case of a domestic uprising.

Such an environment could have easily resulted in an authoritarian turn, if not civil war, were it not for the efforts of Franklin D. Roosevelt (FDR) and his like-minded allies in the Democratic Party. His views were quite well outlined in his pre-election speeches. In his 1932 Commonwealth Club Address he declared that to protect the property of individuals, including their savings, “we must restrict the operations of the speculator, the manipulator, even the financier, I believe we must accept the restriction as needful, not to hamper individualism but to protect it.” Similarly, if financial elites and their political allies “ever use [their] collective power contrary to the public welfare, the government must be swift to enter and protect the public interest.” In his 1936 re-nomination acceptance speech, he thundered that “For too many of us the political equality we once had won was meaningless in the face of economic inequality,” and the financial elite “complain that we seek to overthrow the institutions of America. What they really complain of is that we seek to take away their power. Our allegiance to American institutions requires the overthrow of this kind of power.”

Once in office, FDR immediately set out to bring the crisis under control. He issued Proclamation 2039, suspending all banking transactions, and then quickly passed the Emergency Banking Act, which quickly sorted banks into three categories: those that were fiscally sound, those that could open again with an infusion of capital, and those that would have to close. FDR gave the first of his famous fireside chats, explaining the measures he had taken and restoring a measure of confidence in the banking system. Within a week, the Federal Reserve notes, “banks controlling 90 percent of the country’s banking resources had resumed operations and deposits far exceeded withdrawals.” Economic activity began once more.

These actions merely staunched the bleeding. FDR and his allies then had to grapple with the true challenge: the reassertion of the authority of the state over matters of finance and industry, along with the creation of a national credit system that would serve the interests of the public rather than just the rich, powerful, and connected. The first step was taking back sovereign control over the United States’ currency and credit. Reserve Banks at the time were legally required to hold gold reserves equal to 40 percent of the paper currency they issued—in other words, the creation of credit in the U.S. economy depended on the nation’s gold supply. If financial interests opted to sell their gold to overseas buyers, then America’s credit supply would shrink. In other words, private financial interests could determine the amount of available credit in the United States.

In response, as part of Proclamation 2039, transactions in gold were also suspended and the Treasury Department obtained the authority to regulate its price. Then, on April 5, FDR issued Executive Order 6102, “forbidding the hoarding of gold coin, gold bullion and gold certificates within the continental United States.” In the words of historian Arthur Schlesinger, this “meant that American monetary policy was no longer to be the quasi-automatic function of an international gold standard; that it was to become instead the instrument of conscious national purpose.”

A flurry of additional reforms would follow. The Banking Act of 1933 (also known as the Glass-Steagall Act) established the National Deposit Insurance Corporation (FDIC) and separated commercial banking from investment banking, as the mixing of the two led to risky speculation and the cause of the Great Depression. The follow-up Banking Act of 1935 made the FDIC permanent and “transformed the Federal Reserve into a public entity ensconcing power over the economy in the hands of a publicly run central bank.” The Revenue Act of 1937 cracked down on tax evasion, closed loopholes, and assured the public that wealthy individuals would pay their fair share. Additionally, the administration prosecuted bankers that had violated the law, with officials informing the New York Times that “if the people become convinced that the big violators are to be punished it will be helpful in restoring confidence.”