The colonies would gladly have borne the little tax on tea … had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction. – Benjamin Franklin
Before the revolution, each of the American colonies issued its own currency. When England moved to prohibit "colonial scrip" and impose English currency, it hastened the war of American independence. Americans have always taken skeptically the notion of a national bank. More than two centuries later, many of them still do. Indeed, the U.S. Federal Reserve, the country's fourth crack at it, has become a central issue of the presidential election campaign of 2012. The fundamental question is this: Can American democracy survive the Fed?
What's past, it is said, is prologue. When treasury secretary Alexander Hamilton established the first U.S. national bank in 1791, he financed the venture by selling $10-million in common stock – the first $2-million reserved for the government, the remaining $8-million set aside for the public. The government didn't have $2-million, of course, a problem Hamilton solved in the usual central-bank way. He borrowed it from the bank (which had no funds) – and used the proceeds to buy the required stock.
By all accounts, Hamilton did a creditable job. He established the First Bank of the United States as a private, profit-making institution. He prohibited it from buying government bonds. He required private shareholders to pay one-quarter of their investment in gold or silver coin. He required a prudent reserve ratio of 40 per cent. He required that the bank make loans to the government only on the collateral of its gold and silver reserves. And he required a weekly audit of the bank's books.
Chartered for 20 years of operation, Hamilton's prototype national bank survived the two-term presidency (1801-1809) of Thomas Jefferson, who passionately opposed such institutions as "a back door to monarchy, a vast, secret intricate power beyond the people's understanding and control, unconstitutional, centralizing and aristocratic." Public resistance to it also remained intense. When the bank's charter expired in 1811, the bank expired with it.
A second national bank, chartered for another 20 years, operated from 1816 through 1836; it proved criminally corrupt. A third national bank system supplied Abraham Lincoln with paper currency – greenbacks – to fund the Civil War. A fourth national bank, the Federal Reserve, arrived in 1913 with the dawning of the centralized state. It has survived for nearly a century – demonstrating, through boom and bust, why the American people have distrusted it so much for so long. It was, after all, a primary cause of the Great Depression in 1929 and a primary cause of the Great Market Meltdown in 2008.
When he used his presidential veto to abolish the second of the four U.S. central banks, president Andrew Jackson – "Old Hickory" – listed three reasons why central banks expose democracies to unacceptable risk: (1) they concentrate too much power in a single institution; (2) they make countries too dependent on foreign debt – hence too dependent on foreign countries; and (3) they make the rich richer and the poor poorer. In 1835, incidentally, Jackson paid off the entire federal debt, the only president in history to accomplish such a feat. He championed "a plain system [of government] void of pomp, protecting all and granting favours to none, dispensing its blessings like the dews of heaven."
In some ways, the presidential election now under way evokes the presidential election of 1800. The nation was deeply divided, the rhetoric rude and libellous. The incumbent Federalists wanted more government; the opposition Republicans wanted less. The most heated issue of the campaign: whether or not to end the Fed – and whether to bail out private banks with public money.
Historians now call the 1800 election "the bank war." As a rearguard action, though, it persists to this very day. End the Fed, says Republican candidate Ron Paul. Audit it, says Newt Gingrich, "and find out who got our money." Forbid the bailouts, says Mitt Romney. Even Barack Obama, who bailed out Wall Street financial institutions with low-interest, trillion-dollar loans, now concurs. It's populist politics for sure. But Jeffersonian democracy survives to fight another day – a democracy embodying, as Jefferson eloquently put it in his first inaugural address, "the soul of the nation."