Central Banks And American Aristocracy
July 10, 2012 by Sam Rolley
The United States was built on the idea that every man should have at his disposal the means to achieve financial success regardless of who he is or has been or from where he came.
American society, by its very nature, has historically rejected the idea of an elite aristocracy with the means to lead a less-well-off citizenry by its nose simply because one possesses more political, and economic by way of political affiliation, clout than the other.
But in the 236 years that Americans have existed as a distinctly different people, the citizens of the country that French political writer Alexis de Tocqueville first called “exceptional” in his 1835 work “Democracy in America” have lost a great deal of exceptionalism by placing their trust in the wrong hands.
Around 1790, long before de Tocqueville made his trip to the States to better understand why America worked, there was a political debate brewing that has continued in some form until this very day. Even casual students of American history recall learning of the formation of the Nation’s first central bank and the heated debate about its Constitutionality among proponent Alexander Hamilton — America’s first Secretary of the Treasury — and its opponents then-Secretary of State Thomas Jefferson and Congressman James Madison of Virginia.
Hamilton argued that the establishment of the First Bank of the United States was absolutely necessary to stabilizing and improving the Nation’s credit. He also believed that the formation of the entity would improve the handling of America’s finances overall and handle the war debt that had been racked up by individual States that had printed their own currencies at times during the Revolution. Hamilton, a Federalist, believed that by allowing the Federal government to borrow from a largely private bank to assume the States’ war debts, power could be more easily centralized in the United States.
Jefferson, however, believed that the establishment of the central bank was unConstitutional, as it was a private entity — much like the modern Federal Reserve — and powers of coining and regulating money were specifically delegated to Congress in the founding document. He also believed that the establishment of a centrally controlled banking system endangered his vision of an agrarian republic, a society where producers or “cultivators of the earth” as Jefferson once said, steered the Nation’s economy.
In April 1791, President George Washington signed the bank bill into law. In 1792, Congress passed the Coinage Act and recognized the dollar as the national currency, despite the fact that the first American experiment with paper money — the continental — led to rampant inflation; this is the reason only coinage is recognized as real currency in the Constitution.
It didn’t take long for government and central bank meddling to disturb the natural flow of economics. The “Panic of 1792” occurred when the bank flooded the market with loans and banknotes before revising its policy and reversing course. The sudden halt in market liquidity caused a short-lived panic and froze markets.
The First Bank did have some redeeming qualities, however, despite the con of growing the size of the Federal government. The war debts were largely paid off, and its focus on commercial activities allowed the economy of the United States to grow and diversify. Also, though it did have a lasting economic impact, the men running the institution knew that a great deal of risk taking could lead to the collapse of the young Nation.
The complaints that many Americans had about the first central bank are very similar to what modern Americans critical of the Federal Reserve say about its functions. They charged that there was too much foreign influence in the bank because three-fourths of its stock was foreign-owned. They believed the institution was concealing profits and operating in a shady manner. They were also critical of the bank’s ability to lend money to the government at will. In 1811, the charter to the First Bank of the United States was allowed to expire, but Hamilton’s Federalist legacy lives on to this day.
A year after the initial central bank’s charter expired, the United States found itself at war with Britain once again. After printing money to fund the War of 1812, questions about inflation started to arise and Congress again began to consider the formation of a second central bank. Again, it is important to note, a central bank was created in an effort to pay off war debts. In 1816, the Second Bank of the United States came into existence, but this time with more money to throw around ($35 million compared to the First Bank’s $10 million) and poor leadership. In fact, only 18 months after it opened it was on the verge of insolvency. In 1819, a new president, Langdon Cheves, set out to fix the bank which had continually lent capital to speculators whose ability to repay the loans was questionable. His tightening of loans led to the “Panic of 1819,” which died down quickly since the central bank did not meddle any further. In a letter to U.S. Minister of France Albert Gallatin, Jefferson noted that the wealth wiped out in the Panic was only the wealth that the bank itself had created.
At home things are not well. The flood of paper money, as you well know, had produced an exaggeration of nominal prices and at the same time a facility of obtaining money, which not only encouraged speculations on fictitious capital, but seduced those of real capital, even in private life, to contract debts too freely. Had things continued in the same course, these might have been manageable. But the operations of the U.S. bank for the demolition of the state banks, obliged these suddenly to call in more than half of their paper, crushed all fictitious and doubtful capital, and reduced the prices of property and produce suddenly to 1/3 of what they had been.
In essence, Jefferson described to Gallatin precisely how the central bank was harming his cherished agrarian society by slashing the means of producers and landowners to make profits.
Andrew Jackson took office as President of the United States in 1829 and made it no secret that part of his small-government platform would be the end of the central bank. On this very day in 1832, Jackson vetoed the Second Central Bank’s charter renewal. He later signed an executive order announcing that the Federal government would no longer use it and removed all Federal funds from the bank. This Presidential action of decentralizing economic power has never happened since and will likely never again.
In his veto message, Jackson sums up the reason for his actions in closing:
Experience should teach us wisdom. Most of the difficulties our Government now encounters and most of the dangers which impend over our Union have sprung from an abandonment of the legitimate objects of Government by our national legislation, and the adoption of such principles as are embodied in this act. Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by act of Congress. By attempting to gratify their desires we have in the results of our legislation arrayed section against section, interest against interest, and man against man, in a fearful commotion which threatens to shake the foundations of our Union. It is time to pause in our career to review our principles, and if possible revive that devoted patriotism and spirit of compromise which distinguished the sages of the Revolution and the fathers of our Union. If we can not at once, in justice to interests vested under improvident legislation, make our Government what it ought to be, we can at least take a stand against all new grants of monopolies and exclusive privileges, against any prostitution of our Government to the advancement of the few at the expense of the many, and in favor of compromise and gradual reform in our code of laws and system of political economy.
I have now done my duty to my country. If sustained by my fellow citizens, I shall be grateful and happy; if not, I shall find in the motives which impel me ample grounds for contentment and peace. In the difficulties which surround us and the dangers which threaten our institutions there is cause for neither dismay nor alarm. For relief and deliverance let us firmly rely on that kind Providence which I am sure watches with peculiar care over the destinies of our Republic, and on the intelligence and wisdom of our countrymen. Through His abundant goodness and heir patriotic devotion our liberty and Union will be preserved.
This where de Tocqueville re-enters the story, as he was traveling throughout the United States right about the same time Jacksonian democracy was taking hold in its strongest form, doing research for what would later become “Democracy in America.”
Though he described Jackson as a “man of violent character and middling capacities” in one passage, he was witnessing firsthand the President’s masterful efforts to protect American democracy from the greed of men who would privilege themselves by disadvantaging others.
Unfortunately, despite Jackson’s efforts to do away with the bank before any more damage could be done to the American public, State banks had already issued reckless loans throughout the country. Without a central bank to bail them out, another of Jackson’s economic policies — “Specie Circular,” which allowed for the payment for Western lands in gold and silver coinage — threw them into the “Panic of 1837.” This happened, in part, because the new influx of coinage into banks revealed the lack of true value in paper money. The depression lasted for eight years.
Later in the century, the country would fall into Civil War, a time during which government dabbled in more inflationary finance, racking up huge debts and setting the stage for a central bank once again.
An economic panic in 1907 was the final stepping-stone wealthy elites needed to once again regain control of the financial sector. Just a few years later, in December 1913, the Federal Reserve Act became law and created the central bank from which Americans have yet to free themselves. The creators of the Federal Reserve Bank examined the history behind the collapse of its predecessors and created a monetary goliath that would be difficult to dismantle to give them economic control over the masses.
And they did a good job. It has taken 99 years for the central bank that controls nearly everyone’s life by means of economic meddling to become a mainstream topic of discussion; much of the credit for the newfound interest in the Fed comes from longtime critic Ron Paul. Later this month, Paul’s bill for a full Fed audit is headed to the House floor, and he has written numerous times about what is wrong with the modern central bank. Republican resistance has made a Paul nomination nearly impossible. Had he been given a chance at the Presidency, he may have turned out to be the first President since Jackson to stand up to the economic aristocrats behind the curtain of the central bank. That sort of leadership, it seems, we need now more than ever.