Currency and Banking

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The dominant view at the Constitutional Convention was that the constitution should prevent the state, and especially the federal government, from ever issuing fiat money (currency not backed by specie).  This was stated very clearly and wasn’t entirely the subject of a regional divide at the time (1 p. 315) . Connecticut representative, who would become the third Chief Justice of the Supreme Court, Oliver Ellsworth said of fiat currency: “This is a favorable moment to shut and bar the door against paper money.  This mischief of the various experiments which have been made are now fresh in the public mind and have excited the disgust of all the respectable parts of America. “ Note here that he references broad public knowledge of these matters which could scarcely be said today. George Mason said to the delegates that he had a “mortal hatred to paper money.”  Thomas Paine, who was not a delegate but was a broadly known writer and commentator called fiat currency counterfeiting by the state and went on to say “The punishment of a (member of the legislature) who should move for such a law ought to be death (1 p. 316)”. So clear was this position that the constitution specifically prohibits both the state and federal government from issuing fiat money and Congress very nearly adopted the Spanish dollar as a national currency prior to deciding to mint a US currency (1 p. 324). While the government was denied the ability to create fiat money, it left the door open for it to borrow fiat money from a private bank or banks. 

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The founders clearly had an awareness of the dangers and history of fiat currency, although not necessarily fractional reserve banking, but this didn’t deter those pushing for a central bank (1 p. 327).  The Bank of North America was chartered by the Continental Congress in 1781 modeled after the Bank of England. It was allowed to issue promissory notes in excess of its deposits and initially was seen as a national currency although the bank was a private institution. Its principal purpose was to lend money to the federal government.

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(Note on Central Bank operations and Inflation: modern central banks create inflation or debase currency principally though three processes:  1) by controlling reserve requirement in reference to fractional reserve banking, 2) by buying assets, typically government debt which adds to its reserves and, 3) by altering the rate it charges (rediscount rate) to loan money to other banks. Of the three, the rediscount rate is the most noted and covered in the press but it is of relatively minor importance compared to the other two. When it sells assets this action is deflationary but also rare.) (2 pp. 71-74)

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The bank was riddled with fraud and its bank notes were eventually rejected by ordinary citizens. The bank’s charter expired in 1783 and it reverted to a strictly commercial bank chartered by the state of Pennsylvania. Demise of the bank aligned with a period of unparalleled economic growth and prosperity. The backers of fiat money didn’t give up and in 1791 the First Bank of the United States was created by congress. Alexander Hamilton, who was Secretary of the Treasury at the time, submitted the proposal to Congress and he was also a former aide to Robert Morris who was the founder of the recently defunct Bank of North America (1 p. 328). Investors in the bank included many of the nation’s most influential and wealthy citizens but the largest investment came from the Rothschild’s in Europe. The primary function of this second bank was, like the first bank, to create money for the government which led to inflation with the value of bank notes decreasing by 42% in five years. This was not simply a function of printing but of fractional reserve bank notes created by a central bank. The bank’s charter was revoked in 1811 but this required an unlikely alliance.  The sound money advocates, the Jeffersonians, teamed with the western wildcatter bankers who wanted an unlimited opportunity to create currency. The bank lost by one vote in the Senate and one vote in the House.

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The War of 1812 was unpopular with the American public and it was impossible to fund this venture through taxes alone. The government chose to fund the war by encouraging the wildcat bankers to purchase war bonds, convert them into bank notes, and the government would then use the bank notes to purchase war materials. The nation’s money supply tripled in two years which was accompanied by rampant inflation. A Second Bank of the United States was chartered in 1816 that was very similar to the first bank except that congress required a $1.5 M payment from the investors “in consideration for the exclusive privileges and benefits conferred by this act (1 p. 342)” in what was essentially a bribe. This, however, was a small price to pay and because they received an immediate government deposit of 1/5 the total capitalization.  There was a requirement for the bank to raise $7M in specie but in its second year, the total never rose above $2.5M. The bank was rooted as deeply in Britain as it was in the United States (1 p. 343). As opposed to letting the fraudulent banks fail and letting market mechanisms gradually heal the damage, Congress, by approving the bank, chose to transfer the losses to public and perpetuate a system of fraud (1 p. 359). The bank had a stated policy of only accepting notes from other banks that were redeemable in specie on demand, but when the other banks returned that policy toward the BUS, they lost their resolve. It was larger and better organized than the first bank and had the ability to extend loose monetary policies on a national as opposed to a regional level and, in so doing, established the boom-bust cycle.

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The public started to again favor of sound-money in 1820 but the Republican Party (not the modern Republican Party) had abandoned this position by that time. In defense of sound-money was a new coalition headed by Andrew Jackson and Martin Van Buren that came to be called the Democratic Party. It should be noted at this point that, contrary to those in modern time that try to portray the Democratic Party of today as having significant linkages that remained constant across time, that this is far from true. For the next seven decades, the Democrats were the conservative sound money party of the time.  During this time a principal platform of the Democratic Party was to abolish the Bank. In the 1828 campaign, candidate Andrew Jackson stated his position on the bank by saying, “You are a den of vipers. I intend to expose you and by eternal God I will rout you out. If the people understood the rank injustices of our money and banking system, there would be a revolution before morning. (3)”  The 2nd Bank was headed by Nicholas Biddle who was smart, politically astute, and very well connected politically. Biddle sought to get the bank’s charter extended early hoping that then President Jackson wouldn’t risk a confrontation over the issue – he was wrong. While the bill was easily passed, it was vetoed by Jackson leading to a battle that became the central presidential campaign issue in 1832. When Jackson was reelected by a wide margin, he removed federal deposits from the bank and placed them in regional banks.  Biddle responded by contracting credit and calling loans (1 p. 360) which shrank the money supply and triggered a depression. This led to Jackson’s censure by the Senate, however, as Biddle’s plan came to be better understood by the public it backfired and he was called in testify to a Congressional investigative committee to explain his actions.  Jackson’s censure was rescinded and the third central bank died. Jackson views on the bank are roughly summarized as follows:

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“The Act seems to be predicated on an erroneous idea that the present shareholders have a prescriptive right to not only the favor, but the bounty of the government…for their benefit does this Act exclude the whole American people from competition in the purchase of this monopoly. (4)

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Present stockholders and those inheriting their rights as successors be established a privileged order, clothed both with great political power and enjoying immense pecuniary advantages from their connection with government.

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“Should its influence be concentrated under the operation of such an Act as this, in the hands of a self-elected directory whose interests are identified with those of the foreign stockholders, will there not be cause to tremble for the independence of our country in war… controlling our currency, receiving our public monies and holding thousands of our citizens independence, it would be more formidable and dangerous than the naval and military power of the enemy.

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“It is to be regretted that the rich and powerful too often bend the acts of government for selfish purposes… to make the rich richer and more powerful. Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by acts of Congress. I have done my duty to this country.”

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Jackson survived an assignation attempt in 1835 by Richard Lawrence who stated that he was “in touch with the powers in Europe” (4).

Throughout the back and forth struggle over a national bank, there were clear patterns in those that supported and opposed it. Supporters of the bank tended to have close ties to England and saw themselves as part of an aristocracy class.  Alexander Hamilton spoke of how he saw the relative roles of the political or ruling class and the commoners saying, “All communities divide themselves into the few and the many.  The first are the rich and the well born, the others the mass of the people… The people are turbulent and changing; they seldom judge and determine right.  Give therefore to the first class a distinct, permanent share of the government.  They will check the unsteadiness of the second” (4). Most of this group was also Free Masons, several of whom were very high ranking masons, who wanted to “defy parliament but remain loyal to the crown.” 

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Populist founding fathers like Jefferson, Thomas Paine, John Adams, and John Madison, who were rarely if ever associated with the Masons, wanted to completely severe ties to the British crown. Jefferson argued for a publically controlled central bank stating:  “A country which expects to remain ignorant and free… expects what that which has never been and that which will never be. There is scarcely a King in a hundred who would not, if he could, follow the example of pharaoh – get first all the people’s money, then all their lands and then make them and their children servants forever…banking establishments are more dangerous than standing armies.  Already they have raised up a money aristocracy” (4). As Jefferson watched the increasing influence of European banks in the new republic he observed, “ Single acts of tyranny may be ascribed to the accidental opinion of the day, but a series of oppressions begun at a distinguished period, unalterable through every change of ministers, too plainly prove a deliberate, systemic plan of reducing us to slavery” (4).

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After the end of the USB under Jackson, the House of Morgan gradually emerged as the dominant institution on Wall St. acting as a quasi-central bank starting in 1838. Morgan was a close business associate with the Rothschild family and is seen by many as American agents of the European banking establishment.

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During the era when the country avoided being captured by a central bank there were competing banks that were constrained by market forces.  There were relatively frequent banking and monetary problems but in contrast to the era of the central bank, the economic downturns were shorter and resolved themselves far more rapidly because the moral hazard of defaulted investments weren’t passed to the broader population (aka bailout) and were smaller.  The case that a common central bank would create stability fails to address the fundamental process of investment and risk along with the need for bad investments to default in order for the economy to recover as opposed to simply passing and sustaining bad debt and unproductive enterprises.

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An economy can only expand based on adding personnel or material resources, new technology, or new processes and none of these things can continue on a linear growth pattern for an extended period of time. When an economy can expand readily based on these factors without being constrained by natural resources or economic taxes imposed by the government or financial rents, strong investment returns are can be realized and this was generally the case in America from the colonial period thru WWI with vast natural resources, very rapid population growth through both immigration and birth rate, and multiple step function technological innovations. When this happens, however, capital accumulates and attracts more capital that will always exceed the ability of the economy to expand (5 pp. 27-29) which leads to increasingly risky investments.  This is the nature of compound interest. Capital demands an exponential growth curves and the good producing economy will increase at a decreasing rate.  When capital would attempt to maintain that was not sustainable, eventually it would result in defaults and the at risk investment assets would simply be lost. While there would be brief economic downturns, without a central bank, there was no way to pass the investment losses from the inventors to the public and the goods producing economy directly through bailouts or indirectly through accommodating and inflationary monetary policy.

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Bibliography

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1. Griffin, G. Edward. The Creature from Jekyll Island. Westlake Village, California : The Reality Zone, 1994. ISBN 978-0-912986-45-6.

2. Bothbard, Murray N. What Has Government Done to Out Money? Auburn, Alabama : Misses Institute, 2015.

3. winter, Russ. Winter Watch. Winter Watch. [Online] February 16, 2017. https://www.winterwatch.net/2017/02/pure-political-chicanery-rothschild-trojan-horse-donald-trump-puts-up-portrait-of-the-great-jackson-in-oval-office/.

4. Morse, John. The Event Chronicle. The Federal Reserve Cartel: The Rothschild, Rockefeller and Morgan Families. [Online] June 29, 2015. https://theeventchronicle.com/the-federal-reserve-cartel-the-rothschild-rockefeller-and-morgan-families/.

5. Hudson, Michael. The Destiny of Civilization. s.l. : ISLET, 2022. 978-3-949546-07-5.

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