America's Central Banks (Part 1): An Evaluation of How They and The Federal Reserve Bank Have Performed

In my earlier article (June/July, 2002, Chalcedon Report) on the Federal Reserve, we looked at the motivating forces that led to its founding in 1913, the year that I call "the black, black year of the Republic." In my summary and evaluation I pointed out that the Federal Reserve:

...was conceived in a spirit of deception and came into being through secret collusion of highly-placed anti-free-market oligopolists whose only allegiance was to themselves, to the institutions they controlled, and to the international banking cartel whose ideas the oligopoly finally succeeded in planting here in America.

1913 — The Black, Black Year of the Republic
In order to evaluate the actual performance of the Federal Reserve Bank, we must understand its context. In 1913, the year it was established, the Sixteenth and Seventeenth Amendments were ratified. These three seemingly unconnected, yet crucially important, political acts were successfully "sold" to the American public by power-seeking men entrenched in politics, banking, and international finance. The combination of these acts practically guaranteed the eventual growth of a highly centralized and manipulative fascistic power at the national level,¹ which we see in America today.

The Sixteenth Amendment (which was never properly ratified and was unconstitutionally imposed upon the American public) opened the door to the direct taxation of American citizens by our central government. The personal income tax opened the way for political tyrants and their hired bureaucrats in Washington, D.C., to gorge themselves continually on unlimited tax dollars. Citizens would be intimidated easily by the constant threat of income tax audits by federal agents. These abuses of citizens didn't happen all at once. They occurred slowly as each new generation grew up, unaware that they were losing the greater liberty and degree of privacy that had been enjoyed by their parents and grandparents. Each year every citizen would be forced to "undress" financially before covetous IRS agents.

The Seventeenth Amendment emasculated the States of their formerly strong influence in the Congress as politically sovereign entities. With the Seventeenth Amendment, State legislatures lost the power to appoint Senators — they were now elected by a popular vote just like members of the House. No longer would the States be able to serve as effective buffers against potential political tyranny at the national level. No longer would the Senate have the crucially important job of protecting the independence and political power of the States, which were the creators of the federal government. Henceforth, the election of Senators would fall prey to the same demagogic promises and pre-election rhetoric as found in the election of Representatives. And the States would gradually but effectively be turned into impotent political subdivisions dependent on financial bribes from Washington, D.C. The whole organic fabric of the American Constitution was radically changed by the Seventeenth Amendment.

The Federal Reserve Act created a privately owned central bank able to create an unlimited supply of unearned purchasing media that can be forced onto citizens by a "legal tender" fiat. In effect, in 1913 the Federal Reserve was legally empowered to counterfeit as much new money as central bankers in the Federal Reserve and federal politicians might jointly conspire to issue. This, in turn, has created inflationary booms that are inevitably followed by deflationary depressions.

The combined effect of the three political acts of 1913 served effectively to change the very essence of our American Republic: Gone was the original republican system of government with its carefully limited and divided powers! Now present is a strong and aggressive unitary government with an almost unlimited power to tax and spend which few citizens can resist!² What individual alone can successfully resist the coercive power of the IRS? How many individuals are freedom-oriented enough to say "NO!" to free government handouts, and to consistently refuse their "dainties" (Ps. 141: 4, 8-10; Pr. 23:1-3, 6-8)?

This combination of three political acts of 1913 gradually changed the world-and-life view of Americans and their relationship to civil rulers and made citizens pawns who could be easily manipulated by the distribution of government "dainties."

Early Central Banks in Europe
An historical survey of the formation of central banks in Europe shows that they generally came into being as private banking institutions that provided civil rulers with sorely needed funds as a result of overspending and because the civil treasury lacked funds to conduct expensive wars. Financially pressed rulers would solicit funds from prosperous merchants and bankers who had access to funds through their international business ties. Gradually the moneylenders developed an international network for transmitting timely information and monetary credit across political borders. During the 19^th century the House of Morgan in these United States and the House of Rothschild in England solidified working arrangements that have continued until the present time.

The [First] Bank of the United States
The first official central bank in America was named the Bank of the United States. It was chartered in 1791 for a period of 20 years. Alexander Hamilton, a Federalist who served as Secretary of the Treasury, pushed for its charter. Thomas Jefferson, Secretary of State, and Edmund Randolph, Attorney General, both Anti-Federalists, opposed the charter, claiming that it was unconstitutional. But President Washington was swayed by Hamilton's argument, so he signed the bill.

In addition to the constitutional question, the Anti-Federalists opposed the bill to charter the Bank because they feared that the existence of a central bank would create a powerful money monopoly that would endanger the rights and liberties of the people. Another fear of the Anti-Federalists was that stock ownership of the new Bank might fall into the hands of foreigners. This, indeed, did occur, as we shall see. The Bank's capital was set at $10 million (a large sum in those days). The federal government was to provide 20% of the starting capital, while private subscriptions were to provide 80%.

A sleight-of-hand procedure was used regarding the 20% funding contributed by the federal government. The new Bank, which we will call the [First] Bank of the United States, issued $2 million shares of stock to the federal government. Then the Bank, which had the power to create an unlimited amount of new purchasing media (as all central banks do), loaned $2 million of its newly created banknotes to the federal government. In return the Bank accepted the shares of Bank stock that were issued to the government as collateral!

This collusive procedure of one entity (a civil government) swapping liabilities with another entity (a central bank), and each regarding the received liability an "asset" is the same clandestine means commonly used today by all central banks and civil governments throughout the world insidiously to finance government deficits through bank-creation of fiat money. Such credit-based "loans" generate fabulous interest income for the owners of central banks.

The bill to recharter the [First] Bank of the United States came up in 1811. By that time 70% of the Bank's stock had come to be owned by banking interests in England.³ Public reaction against the Bank was strong. James Madison, then President, agreed with Thomas Jefferson that the Constitution did not allow the government to establish a central bank, so he vetoed the recharter bill.

The [Second] Bank of the United States
The subsequent increase in banknotes, along with government deficit financing to fund the War of 1812, led to an inflationary boom. As a result, practically all banks were forced to suspend specie payments (the redemption of banknotes for gold and silver) in 1814. This generated a reverse public reaction which led to the establishment of a second Bank of the United States.

The rise and fall of the [Second] Bank of the United States makes for a very interesting study of early American money and banking history, but it is too long and involved to go into here. Suffice it to say that the early years of the [Second] Bank's history proved to be a rocky road because of mismanagement. Then a man with banking experience and sharp business acumen, Nicholas Biddle, came onto the scene. The Bank flourished under his hand as president, but he used the credit-based money-creating power of the Bank to influence many members of Congress. Biddle also used the powerful political influence of the Bank in an attempt to do in President Andrew Jackson's effort to be re-elected President of the United States. But Biddle's efforts to use the [Second] Bank for a personal vendetta against Andrew Jackson failed. Biddle then used the financial power of the Second Bank to create real financial havoc, through planned monetary deflation.

The [Second] Bank was then forced out of business, and our country continued to flourish without a central bank, though with some periodic boom/bust periods (caused by the inherent evils of fractional-reserve banking) until the establishment of the Federal Reserve System in 1913.

How Well Did America's Early Central Banks Serve Our Country?
The [First] Bank of the United States operated on a conservative basis and did not unduly inflate the money supply. Therefore it actually served to keep state-chartered banks from over-issuing paper banknotes (an ever-present tendency of banks that operate in a regime of fractional-reserve banking).

As I mentioned above, one disturbing fact about the [First] Bank of the United States, is that 70% of its stock ownership eventually found its way into the hands of British bankers,⁴ who were thus in a position of strong influence in America economically, financially, and politically. This foreign influence was not overtly noticeable and, because of its hidden nature, was even more dangerous. Remember, the War of 1812 was about ready to break out, and the 70% foreign ownership located in Britain naturally favored the British cause.

The [Second] Bank of the United States was a different story. It was reluctantly agreed to by the Anti-Federalists and was strongly favored by the Federalists. The [Second] Bank was capitalized at $35 million. Technically, it was efficiently managed by Nicholas Biddle, but he was a power monger who practically came to own many senators and representatives in Congress by lending them money at favorable interest rates (thus is the insidious power of credit-based central banking evidenced politically). Biddle used the money-creating power of the [Second] Bank to shower with favors those who supported him politically. And he used the Bank's money-control power to contract the money supply to hurt those who opposed him. Biddle's political allies in the Congress purposely requested recharter of the [Second] Bank during the 1832 presidential election in an attempt to defeat Andrew Jackson's re-election bid (the bank's charter was to expire in 1836). President Jackson picked up the challenge and was re-elected. He then vetoed the bill to recharter the Bank.

Beginning in 1833, Biddle purposely caused deflationary downturns in certain areas of the country as a vendetta against President Jackson. This provides a clear historical example of how dangerous a central bank⁵ can become in the hands of individuals who consider their own personal interests more important than the general welfare of the people. The same problem exists with the large-bank interests that dominate central-bank policy in America today, though it is evidenced in a different manner. The ever-present danger of powerful and influential self-interest groups is why the Founding Fathers of our country instituted a government of limited and divided powers that were expressly delegated and that left all other powers "to the States or to the people." This is in harmony with God's many admonitions in the Bible that we should not put our trust in men or in rulers, but only in God (Ps. 40:3; 62:9; 118:8-9; 146:3; Is. 1:21-23; Pr. 23:1-8; 28:28; Jer. 17:5, 9).

In his 1830 message to Congress, President Jackson had proposed a bank of limited scope, but only as a branch of the Treasury Department. Also, it would have no power to make loans or to issue banknotes. His reasons for suggesting this change are found in some notations by Jackson:

It was unconstitutional because Congress has no power to create a corporation; because it withdrew capital from the control of the State; because it bought real estate without the consent of a State, which the Federal Government itself could not do. It was dangerous to liberty because through its officers, loans, and participation in politics, it could build up or pull down parties or men; because it created a monopoly of the money power; because much of the stock was owned by foreigners; because it would always support him who supported it; and because it weakened the State and strengthened the general government.⁶

The tendency of stock ownership to become concentrated in British hands also occurred with the stock of the [Second] Bank of the United States. In his veto message of 1832 Jackson wrote:

By documents submitted to Congress, at the present session, it appears, that on 1^st of January, 1832, of the twenty millions of private stock in the corporation, $8,405,500 were held by foreigners, mostly of Great Britain.⁷

Just a hint of the kind of international "cooperation" (collusion?) that central banks engage in occurred in 1832 when the Treasury notified the [Second] Bank of its intention to pay off six or seven million dollars worth of 3% Treasury loan certificates. So, the Bank sent its representative, Thomas Cadwaladar, to London. He secretly contracted with a banking house in England, the Barings, to purchase the Treasury loan certificates for the [Second] Bank, to hold them, and to make advances to the [Second] Bank on their security. Public agitation against the [Second] Bank was exacerbated in October, 1832, when these secret negotiations became public when the New York Evening Post published a circular that had been sent by the Barings to holders of the loan certificates.⁸

Andrew Jackson's Report to Congress
Many modern economists lampoon Andrew Jackson's "war" against the [Second] Bank of the United States, claiming that the demise of the Bank opened the way for subsequent "wildcat" banking and monetary inflation. But they err in their criticism. The existence of the [First and Second] Banks of the United States led to such widespread use of paper banknotes that people complained of the scarcity of gold and silver specie and the resultant rise in prices. So some monetary inflation during the 20-year charters of both Banks had already occurred. Jackson's intent, as we will see below, was to return our country to a sound gold-and-silver-based monetary system for the benefit of the American working people, the very ones who suffer economic hardship most readily under a credit-based monetary and banking system.

In his December 5, 1836, Message to Congress, President Jackson expresses gratitude to "the Supreme Ruler of the Universe" (Christ). He points out the danger to the people when the government accumulates a large surplus, instead of returning excess monies to the people, because surpluses can be used by banks to extend loans which lead to "a spirit of wild speculation." Then he makes an excellent economic analysis of bank-induced monetary inflation that would please any knowledgeable student of money and banking today. Next Jackson points out that the effect of having a central bank is to allow it to become "a substitute for the Mint of the United States," thus depriving the people from the use of gold and silver in exchanges. He warns that on establishment of a central bank, gold would be "superseded by the paper of the bank as a general currency." And he correctly points out that this creates a tendency for gold to flow out of the country as the domestic currency depreciates in value, and that this would finally lead to going off of a gold-backed currency.⁹ Jackson concludes on a hopeful note:

The lessons taught by the Bank of the United Sates cannot be lost upon the American people. They will take care never again to place so tremendous a power in irresponsible hands,...¹⁰

But the American people, some 77 years later, did place so tremendous a power over our money and banking system and economy. They put even more power in the hands of strong banking interests in 1913 — a banking cartel which wielded great political influence in our federal government, and which led the American people astray. The generation of 1913 trusted more in the promise of a manipulative paper-monetary power wielded by mere mortal men, whom they mistakenly trusted, rather than in the proven economic security of a metallic monetary system which would guarantee their legal right to convert paper money upon demand into gold or silver coins. Americans today are generally unaware of the great economic security and peace of mind, as well as the blessed personal privacy, that comes from the daily use of a gold and silver currency.

See Part Two

Notes

1. For a clear discussion of fascism (a sophisticated form of socialism) see: Tom Rose, "The Isms," Economics: The American Economy from a Christian Perspective (Mercer, PA: American Enterprise Publications, 1985), 115-146.

2. This was the strategy so blatantly used by Franklin D. Roosevelt during the 1930s. Harry L. Hopkins, a dedicated socialist and one of FDR's closest advisors, jubilantly exuberated, "We will spend and spend, tax and tax, and elect and elect!" Thomas A. Bailey, The American Pageant, 4^th ed. (Lexington, MA: D.C. Heath & Company, 1971), 876.

3. Ross M. Robertson, History of the American Economy (New York: Harcourt, Brace & World, Inc., 1964), 160.

4. James W. Gilbart, The History of Banking in America, 1^st ed. (London: Longman, Rees, Orme, Brown, Green & Longman, 1837); reprint, New York: Augustus M. Kelley Publishers, 1967), 8,10.

5. Remember, the Federal Reserve Bank of today, in spite of its name, is a central bank.

6. M. Grace Madeleine, Monetary and Banking Theories of Jacksonian Democracy (Philadelphia: Immaculata College, 1943), 50.

7. Gilbart, 21.

8. Madeleine, 54.

9. Andrew Jackson, "Eighth Annual Message," in The State of the Union Messages of the Presidents, 1790-1966, vol. 1, 1790-1860, ed. Fred L. Israel (New York, Chelsea House Publishers, 1967), 445-446, 450-451, 455-458.

10. ibid., 461-462.