To many, the Bush administration’s plan to commit $700 billion to buy bad mortgages from financial institutions – after recent takeovers of insurer AIG and lenders Fannie Mae and Freddie Mac – is anomalous. It’s certainly at odds with Republican mantra that Uncle Sam should keep his hands off business and out of taxpayer pockets.

But pragmatism is often more important to economics than theoretical consistency. Classic capitalism, described by Adam Smith in his 1776 “The Wealth of Nations,” is self-correcting in theory but inherently unstable in practice.

When very bad things happen to the economy, neither business nor government usually can afford to wait for a “market correction.”

To prevent meltdown, a visible and trusted leader must step forward to restore public confidence and preserve the system’s stability. Today, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are trying to play that role.

In October 1907, it was played by banker extraordinaire J.P. Morgan, who prevented a Wall Street panic and U.S. economic collapse.

The imperious financier was then at the height of his power. He hated government interference and believed business should control government – not vice-versa. When President Theodore Roosevelt started antitrust proceedings in 1902 to break up Morgan’s railroad monopoly in the Northwest, the banker was incredulous.

T.R. was a reformer who railed against monopolists and “malefactors of wealth” like Morgan, but in 1907 Roosevelt was happy to secure Morgan’s help in staving off economic calamity.

A combination of a tight money supply (due to lack of gold when U.S. currency was still tied to gold) and failed efforts by reckless speculators to corner the nation’s copper market had sent a robust U.S. economy into a tailspin. A run on several banks, plunge in stock prices, and surge in business bankruptcies threatened to trigger a panic.

In mid-October, Morgan cut short a trip and returned to New York City to bring the crisis under control.

It took all of his clout to pull it off.

He got the Treasury Secretary to deposit tens of millions in New York banks. At his palatial Medici-style library on 36th Street, near Madison Avenue (which is today a museum), he browbeat prominent New York bankers into lending tens of millions more to restore liquidity to insolvent institutions.

From London, where Morgan also wielded considerable influence, came news of large gold shipments to the United States to ease the shortage. Morgan planted optimistic business stories in the newspapers and even convinced religious leaders to deliver encouraging economic sermons to their congregations.

During two weeks of intensive deal-making, Morgan restored public confidence in the financial system. In the process, he also managed to turn a profit – the fee for his efforts being control of two rescued trust companies and acquisition of a Tennessee iron-and-coal company at a rock-bottom price (while the government overlooked the antitrust implications).

A grateful Roosevelt even invited Morgan to dine at the White House.

In 1907, as today, the self-interest of large financial institutions coincided with the national interest. Although some profited handsomely from the near debacle, a greater catastrophe was averted.

When that catastrophe finally came to pass – the stock market crash of 1929 and the Great Depression – America’s leaders took a different tack. President Herbert Hoover initially trusted the capitalist system to work its way out of the mess and contented himself with giving optimistic speeches about the economy.

Not until 1932, spurred by a restive Congress and the Depression’s severity, did Hoover establish the Reconstruction Finance Corporation to give “pump priming” loans to banks, railroads, farm mortgage associations, industries and other businesses, and to aid state and local governments.

But by then it was too late to reverse the economy’s downward course. In three years, industrial production had dropped by half, more than 5,000 banks had closed, foreign trade plummeted by 300 percent, the Dow Jones Industrial Average fell by 89 percent and unemployment rose to 25 percent.

The result, aside from Hoover’s landslide defeat in 1932, was an economy so anemic that his successor, Franklin D. Roosevelt, was unable to resuscitate it, despite infusing billions of public dollars, a multitude of New Deal programs and a heavy dose of presidential cheerleading. It took another nine years and a massive rearmament program in the run-up to World War II to get the economy back on its feet.

The lesson of history is clear. It’s unpleasant to contemplate government saving banks, businesses and investors from their greed and folly, but the alternatives are much worse.

A bailout isn’t necessarily fair.

It’s just necessary.

Elliott L. Epstein, a local attorney, is founder and board president of Museum L-A and an adjunct history instructor at Central Maine Community College. He can be reached at [email protected]