Here is part Two of the my piece on banking, gold standard, and the Fed.
PART TWO: THE UNITED STATES, THE GOLD STANDARD AND CENTRAL BANKS – A BITTER MENAGE A TROIS
The first coins to be struck in the New World, the Spanish dollar, were pressed at a Spanish mint in Mexico City in 1536. (MBFR) These silver coins eventually found their way up to the English colonies on the eastern coast of the North American continent. The mercantilist policies of the British Crown deliberately tried to keep precious metals out of the colonies, fostering a dependence on Bank of England notes and the debt they inherently carried. In light of such policies, the Spanish dollar became the unofficial currency of colonial America. For smaller transactions, the Spanish dollar was often divided into eight pieces termed bits, hence the term “pieces of eight.”
The American governments first foray in to the realm of paper money came with the Revolutionary War and the need to fund it. Continental dollars, with no standard of value to back them, were printed out of thin air and at such a rapid rate that the currency quickly depreciated to no value. In 1781, at the height of the Revolution, Philadelphia merchant tycoon Robert Morris was given a charter by Congress to establish a privately run central bank. That institution, the Bank of North America, was granted the monopoly privilege to print and issue paper notes, and was the depository of all congressional funds (Rothbard, “The Case Against the Fed” p.70).
In light of the failure of the Continental, in 1791 Alexander Hamilton founded the first central bank of the United States, despite warnings from his contemporaries, namely Thomas Jefferson. The bank, whose charge it was to expand the supply of money for the benefit of the government and the commercial banks, was dismantled twenty years later after a cascade of personal bankruptcies of mostly poor farmers who had eagerly jumped at the cheap, plentiful credit – a collapse labeled the Panic of 1819 (DiLorenzo). The men who penned the United States Constitution delegated the power of money creation and control to themselves, the Congress. Article 1 Section 8 of the U.S. Constitutes grants the Congress the authority “To coin Money, regulate the value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States.”
1816 saw the second attempt at an inflationary central bank in America. President Andrew Jackson denounced the creation as a “monster bank” and famously slew the beast in 1836. He regarded such an institution as not only a threat to liberty, but as an affront to sound money. He echoed Jefferson’s warning saying that, “the bold efforts the present bank has made to control the Government are but premonitions of the fate that
awaits the American people should they be deluded into a perpetuation of this institution, or the establishment of another like it.” (MBFR) More than simply abolishing the inflationary central bank, Jackson introduced the gold standard to American banking in 1834; the value of the dollar being fixed at 1/20 of an ounce of gold, or $20 an ounce. Today, that $20 will not even buy one gram of gold! Adjusted to current inflation rates,
one troy ounce of gold (31.1034 grams) is valued at approximately $733.00 (www.goldprice.org)
The importance of a gold standard backing a currency is self-evident. If an abstract commodity like paper money is to be of any use in trade, it must be redeemable in one concrete form rather than to float amorphously and be traded for anything based on little more than faith in its value. Austrian free market economist Murray Rothbard echoes that sentiment in saying that, “a crucial fact in any economy is that all resources are scarce in relation to human wants. If a good were not scarce, it would be super-abundant, and therefore, like air, would be priced at zero on the market” (Rothbard, The Case Against the Fed p.19). Money, as a commodity, must also be regarded in the same manner. A super-abundance of a monetary unit would devalue it completely to zero. A gold standard also keeps banks honest to the extent that they cannot create vast amounts of money by simply adding zeroes to paper as it rolls from the presses. The U.S. economy saw an extended period of expansion and prosperity under the initial period under the gold standard. However, not all was well and southern planters began to resent the northern textile tycoons for seeming disparities between price offered for their cotton and the price of textiles. Of course, they did not take into account the effect the number of planters would have on the cotton market; with an abundance of cotton supply, the value accordingly dips. More than slavery, the Confederacy sought more economic freedom (most likely to levy import taxes and tariffs on the United States) and free itself of an alliance no longer desired, as was their right. Seeking to shrug off the power of the United States, the Confederacy opened fire on Fort Sumter in 1861, thereby dealing the first blow of the American Civil War.
That following year, 1862, president Abraham Lincoln suspended the gold standard to fund his war effort. The new notes, called Greenbacks for their trademark green ink, were printed endlessly. They held no intrinsic value, were not redeemable in gold or silver, but nonetheless were “legal tender.” How can that be? The greenback was what is called fiat money, that is an inconvertible paper money made legal tender by a government decree. Like the Continental dollar before it, the sheer volume of Greenbacks coupled with their inherent worthlessness forced the government to reinstate a gold standard in 1879. (LVMI) The high profile banking elites of the early 20th century, most notably J.P. Morgan and J.D. Rockefeller, favored a central bank that could create cheap credit and an inflated money supply to finance an expansion of their respective empires, be they financial or industrial.
“If the American people got wind of the idea that this bank was not in their interests, if they in fact understood it was in the interests of the financial elites, who would use it to inflate the money supply and in doing so increase their own revenues, there would have been hell to pay. The legislation would have to be sold to the people as making their money more elastic” says Pace University Economics Professor Joseph Salerno.
1907 saw a series of catastrophic runs on prominent New York banks. The revered Knickerbocker Trust became completely insolvent, and several other banks teetered on the brink of bankruptcy, despite a $35 million bailout from none other than J.P. Morgan. It is widely contended that Morgan himself spread rumors about the insolvency of a few of these prominent banks, prompting the run on deposits. The reason a bank fails on a run is do to the fractional reserve policy; the amount of demand to pay in circulation far exceeded the reserves of gold or other securities. Such is the folly of basing credit on non-existent securities. In 1908 the National Monetary Commission was formed and preceded to lobby and push for a central banking system in America. Interestingly enough, and quite un-coincidently, the committee was chaired by Senator Nelson Aldrich – son-in-law to John D. Rockefeller Jr.
In November of 1910, several prominent bankers boarded a train for a duck-hunting trip. Their actual destination, Jekyll Island Georgia, is now legendary – a veritable Island of Dr. Moreau where a select few financial elites created the abomination that is the Federal Reserve Bank. Among the few men to pen the Federal Reserve Act that weekend were two men representing the interests of John Rockefeller -Nelson Aldritch and Frank Vanderlipp from the National City Bank of New York – and two agents of J.P. Morgan – Henry P. Davidson from Morgan Bank and Trust and Charles D. Norton, President of Morgan’s First National Bank of New York. Signed into law by president Woodrow Wilson in 1913, the Federal Reserve Act established a monopoly cartel of money creation and distribution in the United States.
