A National but not a Central Bank to the Dismay of Hamilton and Jefferson

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This is a follow up to my previous article, David Ricardo and the Role of Central Banks.

We take for granted the Federal Reserve’s unique powers that, like that of other central banks, include being the sole issuer of currency. But those powers were not always so, and their origin traces to the foresight of Alexander Hamilton.

Three decades after the formal establishment of the United States of America, David Ricardo stated to Parliament’s his objections to the Bank of England having sole authority over its note issue. Ricardo was not objecting to the bank’s notes being legal tender, as they had been even after the bank suspended exchanges for sterling in 1797. Symbolic money was an absolute necessity for society. Without the obvious utility of paper money, both credit and commerce could not grow and Britain’s prospects would be permanently diminished. Neither was he questioning the logic of the monetarist arguments he had made to Parliament in favor of a return to the gold standard. The outstanding volume of bank notes needed to be controlled.

His caution was straightforward. If a central bank was to determine, by committee vote, both the amount of symbolic currency in circulation and the interest rate at which specie could be borrowed, how could open market outcry and private commerce have any influence on the setting of discounts? Experience had proven that the specie content of a country’s money and the amounts of cash outstanding in each country determined the exchange rates of their respective currencies. What gold could buy would fluctuate, as did all prices. In time of war or panic, specie might be hoarded, and promises to pay have to substitute for actual payment. But symbolic money could only continue to work successfully if the Bank of England did not set its price. To do otherwise was, in Ricardo’s view, dangerous both to personal liberty and to national security. The temptations to print and then to remedy “overheating” by restraining credit would be overwhelming.

These were not the temptations that the first Congress of the United States of America faced when it met in 1790. The new country did have its own unit of account – the dollar; but, unlike England, it did not have a currency. When Ricardo made his speeches to Parliament, pound notes were suffering from a 3% to 5% discount to guineas. Nowhere in the United States – not in New York or Boston or Charleston or Philadelphia – had anyone seen a quote for the official American paper currency – the Continental dollar – in a decade.