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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.
If there is, among economic historians and economists, some grudging acceptance of Washington’s decisions about central banking as having political necessity, there is no acceptance at all of what Andrew Jackson and his advisor, Amos Kendall, chose to do. In little more than three years, Jackson sustained his veto of the extension of the charter of the country’s central bank, strong-armed Congress into having the Treasury’s deposits distributed throughout the United States to federally-approved banks, and, by executive order, limited all future acceptances of payments by the Treasury to gold and silver coin. These actions are now universally considered, by all modern economic minds, to have been pure folly. Many scholars blame Jackson (and not the Bank of England) for the financial catastrophe of the first international depression that began in Europe in 1837. Even Jackson’s otherwise adoring biographer, the late Robert V. Rimini, thinks the president’s actions and ideas can only be explained away as lunacy, the decisions of a thoroughly “wild romantic.”
Ron Paul is, as far as my research can discover, the last serving member of Congress to believe that the United States can survive without a central bank. Since his retirement from office, conservatives have continued to criticize the Fed’s decisions; but none of them has gone on record, as Congressman Paul has done, arguing for the outright repeal of the Federal Reserve Act. Critics from the left side of the political aisle have been even more severe than conservatives in condemning the U.S. central bank and its policies; but they, too, are unwilling to do away with the country’s monopoly bank of deposit, discount and issue. Socialists and other monetary radicals think that our economy must have the kind of central bank that Andrew Jackson abolished. Indeed, modern progressives argue for the reduction and eventual elimination of all disparities of wealth and income to come through the Federal Reserve’s distribution of more and more legal tender, by adoption of MMT and initiation of a debt jubilee.
There is an equally broad consensus among politicians and economists, both in and out of government, that a resumption of the constitutional standard of coin as money would be a catastrophe. As President Trump’s Fed nominee, Judy Shelton, discovered in her recent appearance before the Senate Banking Committee, it is dangerous to one’s reputation to have even examined the theoretical possibilities of a “gold standard.” In defending herself, Shelton assured the committee that she agrees that the Fed can only manage employment, price inflation and government and private credit through its attempts to discounts the prices for unconvertible money owned and credited now and promises to deliver such currency in the future. In monetary policy, she said, one can only look forward.
That is certainly what Andrew Jackson and Postmaster General Kendall were doing in 1836. The year before they had arranged for the Democrats to hold the first modern political convention so that Jackson could guarantee that his vice-president, Martin Van Buren, would be the party’s choice for his successor. Even as popular as he had become, Jackson could not run for a third term. Like Jefferson, Madison, and Monroe before him, Jackson has been constrained by the universal public opinion that no person should exceed Washington’s two terms in office. It would be up to Van Buren to carry out the final step in Jackson’s plan – the creation of the independent Treasury. Instead of remaining on deposit with state-chartered banks, the federal government’s specie would be held in the vaults of its own depositories.
Critics, then and now, wondered what the point of it all was. The second bank of the United States had promised to redeem its bank notes in gold, and now the Deposit Act banks – Jackson’s “pets” – were being required to live up to the same pledge to “redeem its notes and bills on demand in specie.” In vetoing the extension of the second bank of the United States’ federal charter, Jackson and Kendall were not rejecting the value of the bank’s branch network and its correspondent relationships with other private and public banks, both in the United States and abroad. On the contrary, the Deposit Act required that all banks receiving federal deposits would “render to the government of the United States all the duties and services heretofore required by law to be performed by the late bank of the United States and its several branches or offices.” Jackson and Kendall certainly did not expect people to transfer funds and clear balances solely through lugging around sacks and purses full (or not so full) of gold and silver coins. They were not even expecting the federal government itself to stop using paper. The Deposit Act anticipated that the Treasury would continue to write warrants and drafts as a means of transferring funds between its branches; it would use local clearing houses to settle the accounts the government had with its vendors. In practical terms, the Deposit Act and the Independent Treasury that would follow were establishing precisely the structure that the Federal Reserve Act would enact. The government’s money would be held in separate facilities throughout the country that would have their own supervision; they would not be mere interdependent branches, as under the second bank of the United States, but independent regional treasuries.
What, then, was different? Jackson and Kendall’s plan for the independent treasuries was, in their minds, the logical extension of the decision that Washington and his advisers had made. Their decision was taking the United States forward by ending the detour Madison, Monroe and Quincy Adams and Congress had taken in following the example of the Bank of England. In order to pay for a war, and its subsequent debt, the Democrat-Republicans had chosen to ignore both the Constitution and the wisdom of segregating the central government and its money from the country’s dealings in commerce and credit. Precisely because Congress’ powers were, within the limitations of the Constitution, nearly absolute, the lawyers’ wonderful ability to fudge and distinguish could not be allowed to bend the rules.
Did Congress have the power to print money? No. Did it have the power to lend it? No. Borrow, yes. Tax, yes. And without any limitations other than the citizens’ and the states’ rights. The first bank of the United States had been able to offer the government of the United States credit. The government’s own shares in the bank had been purchased on margin. But the first bank had had no authority to print money or use such legal tender authority to extend the deposits of the United States as the reserves for loans to third parties. The second Bank of the United States, like the Federal Reserve, had been able to do both; and those were powers that Congress did not have the power to delegate.
Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.
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