Will the Republic be Redeemed? Part Two

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To read part one in this series, click here.

The evolution of the role of the Federal Reserve as the U.S. central bank and how paper money came to be accepted as legal tender with a stable value, exchangeable into gold, can be traced to the first half of the 19th century.

From February 27, 1797 until May 1, 1821, England came perilously close to adopting the barbarous system of open deposit and exchange that the Americans had adopted six years earlier with its creation of the Bank of the United States. The U.S. Constitution and the Congressional laws establishing the Bank of the United States had allowed prices in dollars to be subject to continuous discounting against every means of payment. This anarchy of monetary exchange was not “the discount” that Dutch finance had brought to England as part of the Glorious Revolution. Bank note issuers in the New World were using the same discount mechanism that the Bank of England and other European note issuers had developed; for issuing their own notes in exchange for the borrower’s private bills of credit, they would charge a fee. The bill of credit would be valued in the exchange at a discount from its declared amount. The newly created American banks had gone far beyond that conventional discounting of private debt paper against officially licensed note issues. The Bank of the United States and the state-chartered banks were discounting all exchanges of both foreign and domestic paper currency, notes and coin, even the notes of the country’s new central bank. Nothing was automatically guaranteed by law to have the fixed value of its par denomination.