Mises Daily Articles
A Fake Banking History of the United States
[An MP3 audio version of this article, read by Dr. Floy Lilley, is available here.]
Ask yourself this question: was the housing price bubble, which has burst, caused by (a) a Fed policy of too much liquidity, which caused artificially low interest rates, which in turn caused a great deal of malinvestment, or (b) a Fed policy of too little liquidity which caused high interest rates and a credit-starved economy? If you chose answer b, congratulations, you may have a future as a celebrated author, historian, and Wall Street Journal commentator.
Answer b is a theme of a truly ridiculous article by John Steele Gordon in the October 10 issue of the Wall Street Journal online entitled "A Short Banking History of the United States." The article is an attempt to defend the Fed, its founding father, Alexander Hamilton, and the regime that it finances. (Gordon is the author of a book entitled Hamilton's Blessing which sings the praises of a large public debt, something that Hamilton himself called a "public blessing.")
Rather than faulting the Fed for creating yet another boom-and-bust cycle, Gordon blames the current economic debacle on "the baleful influence of Thomas Jefferson." Jefferson was the foremost opponent of a bank capitalized with tax dollars and operated by politicians and their appointees from the nation's capital — Hamilton's Bank of the United States (BUS), a precursor of the Fed. Thus, despite the fact that the real blame for the current economic crisis lies squarely in the lap of the Fed and its ideological underpinnings — particularly the legends and myths surrounding Hamilton — Gordon attempts to convince us that opposition to politicized, centralized banking is the real problem. Anyone who believes this could easily be persuaded that up is down, white is black, and day is night. The purpose of the Fed, according to Gordon, is to serve as a sort of a monetary benevolent despot: "To guard the money supply … regulating the economy thereby."
Right-wing statists like Gordon, like left-wing statists, have adopted the custom of smearing Jefferson as a slave owner not so much because they are appalled that he owned slaves, but because their objective is to denigrate his laissez-faire/limited-government political philosophy. Gordon includes the Jefferson slavery smear in his article, but fails to mention that his hero Hamilton also owned "house slaves," which were brought into his marriage by his wife Eliza; he once purchased six slaves at an auction; and he supported the return of runaway slaves to their "owners" under the Fugitive Slave Clause of the original Constitution.
Indeed, nearly all of the "first families" of the New York City of Hamilton's time — his main social and political circle — were slave owners. As Hamilton biographer Ron Chernow has written, during Hamilton's time, "New York City, in particular, was identified with slavery … and was linked [economically] through its sugar refineries in the West Indies" (where Hamilton was born and raised). By the late 1790s slaves were "regarded as status symbols" by the wealthiest New York families.
Gordon spreads several other falsehoods about Jefferson in the leading paragraphs of his article. This in itself is telling, for it shows that court historians like John Steele Gordon fully understand the importance of Hamilton's statist political philosophy in propping up the Fed and the regime that it finances. Gordon claims that Jefferson, a lifelong businessman, "hated commerce," "hated banks," and "may not have understood the concept of central banking." He also argues that Hamilton, by contrast, had a "profound understanding of markets" because he worked as a bookkeeper for British slave-owning sugar-plantation operators and exporters as a teenager on the Caribbean island of St. Croix. This is nonsense on stilts, as the philosopher Jeremy Bentham is supposed to have said with regard to another spurious claim.
What Jefferson opposed was Hamilton's mercantilist policies of government-controlled banking, corporate welfare, protectionist tariffs, heavy excise taxation, excessive public debt, and other interventions. Unlike Hamilton, Jefferson had read and understood Adam Smith's Wealth of Nations and his Theory of Moral Sentiments, as well as the work of David Ricardo, Jean-Baptiste Say (who Jefferson tried to get to join the faculty of the University of Virginia), Richard Cantillon, and other economic theorists of that era. Hamilton was ignorant of or ignored all of this. His major intellectual influence was a propagandist for the British mercantilist regime named Sir James Steuart.
As Murray Rothbard wrote in an article entitled "A Future of Peace and Capitalism,"
Jefferson was very precisely in favor of laissez-faire, or free-market, capitalism. And that was the real argument between [Hamilton and Jefferson]. It wasn't really that Jefferson was against factories or industries per se; what he was against was coerced [economic] development, that is, taxing the farmers through tariffs and subsidies to build up industry artificially, which was essentially the Hamilton program. Jefferson … was a very learned person. He read Adam Smith, he read Ricardo, he was very familiar with laissez-faire classical economics. And so his economic program … was a very sophisticated application of classical economics to the American scene … classicists were also against tariffs, subsidies, and coerced economic development…. The Jeffersonian wing of the founding fathers was essentially free-market, laissez-faire capitalists.
Compared to Jefferson, Hamilton was an economic ignoramus. His reputation as some kind of financial genius has been greatly exaggerated and fabricated, as the great late-nineteenth-century Yale sociologist William Graham Sumner wrote in his 1905 biography of Hamilton. In his Report on Manufacturers, for example, Hamilton presented the cockeyed notion that international competition would cause higher prices and protectionism would cause lower prices by causing domestic producers to compete more vigorously with each other. History had proven this to be an absurd idea long before Hamilton's time.
Hamilton also condemned transportation costs, calling them "an evil which ought to be minimized" through protectionism. Of course, transportation costs also affect interstate trade, but Hamilton never voiced his opposition to them in that context. Hamilton was such a mercantilist that he even argued in favor of "a monopoly of the domestic market" by banning all imports altogether. It is little wonder that William Graham Sumner referred to Hamilton's Report on Manufactures as a mass of economic confusion, just the opposite of a "profound and practical understanding of markets."
Jefferson was not the only prominent opponent of Hamilton's scheme to establish a bank operated by politicians out of the nation's capital. James Madison also opposed the First Bank of the United States (BUS). The Virginia Senator John Taylor was as learned on the subject of political economy as Jefferson was, and immediately recognized the danger of imitating the Bank of England as a financier of mercantilist subsidies. "What was it that drove our forefathers to this country?" he asked. "Was it not the ecclesiastical corps and perpetual monopolies of England and Scotland? Shall we suffer the same evils in this country?" Hamilton's answer would have been "why yes, we shall, for it is the surest route to accumulate power and wealth for myself and my fellow Federalists." As Gordon wrote, "Hamilton wanted to establish a central bank modeled on the Bank of England."
John Steele Gordon's "short history" of banking is completely filled with falsehoods. Throughout his article, he blames Jefferson's opposition to central banking for economic problems that were in fact created by Hamilton's Bank of the United States.
As Murray Rothbard wrote in A History of Money and Banking in the United States (p. 69), as soon as Hamilton's bank was established it
promptly fulfilled its inflationary potential by issuing millions of dollars in paper money and demand deposits, pyramiding on top of $2 million in specie. The Bank … invested heavily in loans to the United States government…. The result of the outpouring of credit and paper money by the new bank of the United States was … in increase [in prices] of 72 percent [from 1791–1796].
The BUS charter was not renewed after its first twenty years. Gordon blames Jefferson for this, but the above-mentioned economic instability that was caused by the BUS surely played a role. (And I'm sure Jefferson would have been proud to accept the credit for the demise of the BUS.) The BUS was revived after the War of 1812 (in 1817) and it immediately "ran into grave difficulties through mismanagement, speculation, and fraud," wrote James J. Kilpatrick in his book, The Sovereign States. Consequently, "a wave of hostility toward the Bank of the United States swept the country," which eventually led to President Andrew Jackson's veto of the bank rechartering bill.
In 1817 the BUS quickly lent $23 million with a specie reserve of only $2.3 million. This flood of cheap credit created a brief economic boom, and then the inevitable bust, or depression, known at the time as the Panic of 1819. As Murray Rothbard wrote in The Panic of 1819, personal bankruptcies abounded, especially among farmers who had overextended themselves thanks to the BUS's cheap credit; and there was for the first time large-scale unemployment in American cities, with manufacturing employment in Philadelphia falling from 9,700 employed persons in 1815 to only 2,100 in 1819. This was all Jefferson's fault, says John Steele Gordon.
Another one of Gordon's false claims is that "The Civil War ended … monetary chaos when Congress passed the National Bank Act," which would become the state's monopolistic monetary regime until the creation of the Fed in 1913. In reality, the so-called Independent Treasury System that existed from the early 1840s to 1863 was arguably the most stable monetary system in US history. Modern economic scholars have evaluated the Lincoln regime's National Currency Acts and have arrived at the opposite conclusion of Gordon's. In an article entitled "Money versus Credit Rationing: Evidence for the National Banking Era, 1880–1914" (in Claudia Goldin, ed., Strategic Factors in Nineteenth-Century American Economic Growth) Michael Bordo, Anna Schwartz, and Peter Rappaport concluded that this Hamiltonian system "was characterized by monetary and cyclical instability, four banking panics, frequent stock market crashes, and other financial disturbances."
Gordon notes that "inflation took off in the 1960s" but does not blame the actual cause of the inflation — the Fed and its legalized counterfeiting operations. He concludes by praising the regime's current plans to nationalize the financial markets by assuming stock ownership in banks and appointing the US Treasury secretary as the nation's first financial dictator. He thinks this will finally, at long last, achieve Hamilton's dream of a "unified and coherent regulatory system free of undue political influence."
Of course, no government institution in the history of the world has ever been free of political influence, due or undue. This is perhaps Gordon's most spectacularly stupid remark.
"Unified" or centralized regulation of industry has long been a goal of statists who favor regulatory dictatorship as opposed to a governmental regime that delegates "too much" regulatory power. Gordon himself bemoans the "conflicting" regulations on the banking industry that have been imposed by the Fed, and the FDIC, FSLIC, SEC, and other federal regulators.
The system of financial regulatory dictatorship that Gordon praises, and which is about to be forced down the throats of the American public, has been tried before in other countries. During one of its own periodic financial crises, Italian government officials complained bitterly, as Gordon does, of regulation that has been "disorganic" and "case by case, as the need arises." The Italian regime altered its regulatory system so that it could pursue "certain fixed objectives," just as Gordon argues for a "unified and coherent regulatory system." This highly centralized or even dictatorial regulatory system, the Italians argued, would supposedly "introduce order in the economic field" and achieve the goal of "unity of aim" with regard to government regulation of industry.
All of the words in quotation marks in the preceding paragraph, except for the last ones, are the words of Benito Mussolini. The "unity of aim" phrase was from Mussolini apologist/propagandist Fausto Pitigliani. There is, after all, a very keen similarity between Hamiltonian mercantilism — or an economy directed and controlled by government, supposedly "in the public interest" but in reality for the benefit of a privileged few — and the economic fascism of Italy (and Germany) of the 1920s and '30s.