Why an Independent Treasury?

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We take for granted the government’s ability to print money and to provide credit to banks and other third parties. Those powers evolved from political struggles nearly 200 years ago, and that episode in our history carries a message for those who argue against an independent Fed or for policies such as MMT to fight inequality.

Some modern economic historians are willing to accept Washington’s rejection of Hamilton’s idea of a federal central bank as a political compromise that our first president had to make with the Jeffersonian members of his cabinet. Others are less forgiving and view our first chief executive’s decision as further evidence that Washington simply did not understand economics.

What is completely missing from any current historical assessment is the belief Washington had sound reasons for agreeing with Thomas Willing and Gouverneur Morris. Their counsel was that the new country needed a nationally-chartered bank: the new federal government had to have a place to put its money that was safe from the legal jurisdiction and potential confiscation by the states. Having just lived through a decade in which state legislatures happily confiscated property belonging to actual or merely alleged Tories, Washington and his financial advisors were not willing to wait for Justice Marshall’s decision in Marbury versus Madison to establish that deposits belonging to the United States of America were not subject to the judgments of any state court.

At the same time, Washington was not prepared to allow the federal government to escape the constitutional rules that bound the states. If the states had no authority to issue bills of exchange, neither did Congress and the president. A nationally-chartered bank could not have the authority to issue paper legal tender because Congress itself has no such authority. Money in the United States of America had to be coin, either foreign or domestic. Congress could regulate foreign coins to assure that their values – i.e. their weight and fineness – were consistent with those of U.S. currency; but it was not given the power that the Continental Congresses had claimed for themselves: the Congress of the United States could not, under the Constitution, print money. Neither, argued Willing and Morris, could Congress use the dodge that Hamilton recommended. Since Congress could not constitutionally issue bills of exchange, neither could a bank that Congress created. The first bank of the United States would act as a depository for the government’s funds and its agent for foreign exchange transactions and the trades and redemptions of the public debt. It would not, as Hamilton wanted, follow England’s example and establish a central bank of issue as sole custodian of the government’s money.