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Judy Shelton, whom President Trump has nominated to serve as a Federal Reserve governor, has written about the virtues of the 19th century gold standard and expressed her eagerness to join the central bank in managing the nation’s money supply. That would have been an unacceptable position for anyone supporting the Constitution’s specie standard for money in the 1830s. For those who supported Andrew Jackson, the country could not have a central bank of issue and put a gold standard into practice. To enjoy the virtues of having coin as the only legal tender, the nation’s first central bank of issue would have to disappear.
By the last year of his second term, Jackson had won nearly every fight about the nation’s political economy; but he had yet to win the war to restore “hard money” as the legal tender of the United States of America. The charter of the second Bank of the United States had formally expired as of February 1, 1836, so the country was once again without a central bank of issue and deposit. However, the Bank continued in operations under its new Pennsylvania state charter and still retained the Treasury’s accounts. In practical terms, nothing had changed. The Bank continued to receive deposits from the Treasury and to do everything that the Federal Reserve Banks now do; with its reserve of the Treasury’s own deposits, the Bank could continue to regulate the supply of the country’s credit and currency through its discounting.
The Democrats, the majority in Congress, were nominally members of Jackson’s own party; but only a fraction of them were supporters of the President’s financial policies. The factions led by Senators Clay of Kentucky and Calhoun of South Carolina continued to disagree over the tariff rates; but they agreed that the United States’ money should continue to stay with the Bank. Clay’s supporters – the people Andrew Jackson labeled as “the improvement interest” – expected the Bank’s own note issues and its acceptances of private and state-chartered bank notes to provide the capital for the extension of the National Road and continuing construction of the Chesapeake and Ohio Canal. Calhoun’s faction hoped for a lowering of the tariff rates and had received encouragement from Nicholas Biddle at the Bank. They knew that Vice-President Van Buren, Jackson’s chosen successor, would not want the Port of New York’s collections to be diminished by a tax cut.
Throughout the spring of 1836, the Jackson Administration worked on a deal with those in Congress who wanted the federal government’s accounts to stay with the Bank of the United States. The result was the Deposit Act, which the president signed into law in June. The Treasurer of the United States was authorized to remove the federal government’s accounts would be removed from the custody of the Bank of the United States. Those balances and all future tax deposits would be deposited in banks in the states and territories that qualified under the Deposit Act. The reward for the members of Congress who voted for the legislation was the “distribution”. Under the Act the entire federal surplus above $5 million would be distributed to the custody of the state governments and territories by deposit to their accounts with those Deposit Act banks. The distributions would be made during each quarter of 1837. Levi Woodbury, the Treasurer, informed Congress that, as a concession to practicality, the government would not make an immediate withdrawal from the Bank of the United States. Instead, the Treasury would deposit all incoming tax receipts with the Deposit Act banks and pay the government’s expenses by drawing down the funds still at the second Bank. In its structure Jackson’s bank system actually was closer to the initial design of the Federal Reserve Banks Act of 1913. The second Bank of the United States had been a central bank with branches. The Deposit Act banks, like the Federal Reserve Banks before the 1933 Banking Act, were separate entities each holding their own reserves. The critical differences were the absence of any central Board of Governors and the break-up of the concentrated “reserve” held by the Bank into separate and independent pieces.
Jackson’s opponents complained that Jackson had simply substituted his own “pet” banks for the Bank of the United States; the Deposit Act was merely a reward to Jackson’s supporters and a destruction of what had been a safe and workable central banking arrangement. In fact, the President’s terms for allowing banks to receive and hold on deposit the Treasury’s tax collections were far more rigorous than those Madison had imposed on the second Bank. The legislation required the banks to “furnish to the Secretary of the Treasury, and to the Treasurer of the United States, a weekly statement of the condition of his account upon their books. And the Secretary of the Treasury shall have the right, by himself, or an agent appointed for that purposes to inspect such general accounts in the books of the bank.” The reporting requirements for the second Bank of the United States had been far more gracious; the Bank would submit a periodic report, at its discretion.
The passage of the Deposit Act was not, for Jackson and Secretary Woodbury, the end of their plan to remove the federal government from participation in the money market. Their ultimate goal was to have the U.S. government’s transaction accounts deal only in gold and silver coin and to have all federal balances detached from the country’s credit and symbolic currency exchanges. The government’s holdings of specie would no longer act as reserves for any banks of deposit but would be physically separated – an independent Treasury. That could only happen when the government stopped accepting the notes of the private and state-chartered banks. With the expiration of the second Bank of the United States’ charter and the passage of the Deposit Act, the Treasury had ended the practice of allowing tariffs to be paid by book deposits to its general account and the acceptance of bank notes in payment of customs duties had ended. All payments for tariffs were being made in coin. There was still a specie loophole - payments made for the purchase of federal lands. Except for the period of the actual war, the Public Lands Office (established in 1812) had experienced an almost continuous boom in the sale of the government’s land. Buyers had used bank notes, warrants and other forms of legal tender paper for their purchases. The second Bank of the United States had claimed credit for regulating the quality of the notes presented in payment, but it had itself been the largest issuer of such notes. Since President Jackson’s re-election in 1832, annual land sales had increased five-fold.
If the distribution of the federal surplus to the accounts of the States and territories had been the incentive for passing the Deposit Act, the “quid pro quo” for the President was Congress’ acceptance of the Specie Circular. In July, by executive order, the Administration changed the rule for purchases of Federal land. After August 15, 1836 all plots of land larger than 320 acres would be paid in gold and silver coin. After December 15, 1836 purchases of any size would have to be paid in specie. As always, there was an exception added to persuade certain needed members of Congress to accept the terms of the deal; scrip issued by the State of Virginia to its creditors during the War of 1812 would continue to be accepted as payment.
With the veto of the second Bank’s federal charter, the Deposit Act and the Specie Circular, President Jackson achieved his goal. The government’s money was still on deposit with banks, but the independent Treasury would be a matter of formality. The surplus would be delivered by transfers from the Treasury account to those of the states and territories; and, once those distributions began, Congress would be happy to let the Treasury keep the residue in its own depository. Washington’s hope for a national government, free of debt, using entirely its own Constitutional money, would be achieved. For Jackson, who had lived and fought through every war in the country’s history, the Constitution’s financial construction made eminent sense. There was no way to pay for war except to borrow, and to issue fiat currency was folly. As the British, with their Bank of England, had proven, depositors and bondholders will accept delay and even discount if they had confidence that their claims would be paid in money that could be spent abroad. It was entirely appropriate that Congress have unlimited authority to tax and borrow Money. As the country had shown, enormous debts could be refinanced and even discharged as long as the world knew that commerce and trade and not lawyers would define the legal tender.
The Revolution and the country’s lesser wars had proven that no legislature could be trusted to set the boundary between currency and credit. Having the waste, corruption and folly of the Continental Congress clearly in mind had led Washington and his veterans to prohibit even the most brilliant lawyers from having the power to legislate the legal tender. In exchange for having their debts absolved, the States had been explicitly prohibited from exercising any sovereign authority over the currency. In enabling a credit currency through the Second Bank of the United States and the state-chartered banks, Congress and Washington’s successors had claimed a power that they did not have. In Jackson’s mind, there was no way the words “To coin Money, regulate the Value thereof, and of foreign Coin” could be construed to mean anything other than what they clearly intended.
On December 5, 1836 Andrew Jackson’s clerk read to each house of the Congress the President’s final State of the Union Address to “Fellow Citizens of the Senate and House of Representatives”. This was, in no way, meant as a parting insult; having the President personally read the Address to Congress only became an established tradition with Woodrow Wilson in 1913. Until that time the convention had been for the President to deliver to the House and to the Senate individual documents containing the text. The clerk’s reading of the address was to assure that the President’s words were part of the official record of each assembly. Among them were these: “The mass of the people have more to fear from the combinations of the wealthy and professional classes – from an aristocracy through the influence of riches and talents, insidiously employed....in preventing political institutions, however well adjusted, from securing the freedom of the citizen.”
Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.
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