Andrew Jackson and the Independence of the Central Bank

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The independence of the Federal Reserve Bank is not a new issue. The role of the central bank in regulating credit and the money supply goes back at least 200 years, to the administration of Andrew Jackson.

By 1832, the United States of America was no longer a “developing” country. Its size and wealth had increased so much since the turn of the 18th century that the U.S. was largely an independent economy. Its commerce and trade were no longer those of a peripheral component of the British Empire. In the three decades since 1801, the GDP of the former colonies had grown from 25% to 42% of Great Britain’s. Measured by individual wealth, the two countries were almost equal; in 1831 per capital GDP was $101 for Great Britain and $79 for the U.S.

Measured by government debt and tax revenues, the United States was in a much stronger position than its “mother country.” For the fiscal year ending June 30, 1831, the Federal government collected $28.5 million; gross public debt was $24.3 million. For the calendar year 1832 the parliament and the Crown collected $264.9 million (54.5 million pounds); its gross public debt was $3.82 billion (785 million pounds). (All figures use the conversion rate of $4.86 to 1 pound – the ratio of the gold content of each country’s legal tender.) While Great Britain, the center of international exchange and commerce, had to carry the accumulated burden of its wars against France, somehow, the United States had no significant war debts. For Great Britain the national debt was 155% of GDP and 14.4 times government revenues; for the U.S. the national debt was 2.3% of GDP and less than its government revenues.

These comparisons exaggerate the America’s relative prosperity because they do not include the state and local debts and taxes that were part of the United States’ federal system. But, they greatly understate the national government’s relative credit-worthiness. For FY 1831 the U.S. Federal government had a surplus of $13,279,000, nearly half of total tax collections. There was every reason to expect that, if President Andrew Jackson was able to remain in office for a second term, the country would completely eliminate the federal government’s gross public debt. (And, indeed, it would; over the remainder of Jackson’s tenure as president the Federal government’s budget would achieve a surplus of $66,488,000; for both 1835 and 1836, the government of the United States of America would be – for the only times in its history – without any debts other than the amount of its year-end payables - $38,000.)

The U.S. was not completely free of worry; like every other country, including Great Britain, it needed to earn enough international money - i.e. gold and silver coin – to pay for the trade balances that could not be cleared through financial accounts. But, as Adam Smith had written on the year of American independence, “(i)t is convenient for the Americans, who could always employ with profit in the improvement of their lands a greater stock than they can easily get, to save as much as possible the expense of so costly an instrument of commerce as gold and silver….. (i)n the exterior commerce which the different colonies carry on with Great Britain, gold and silver are more or less employed exactly in proportion as they are more or less necessary. Where those metals are not necessary they seldom appear. Where they are necessary they are generally found.”