Will America’s Bank War Again Realign Politics?
It can be said that the present day financial crisis and the broad and sweeping powers the U.S. Federal Reserve has assumed in its wake all share their origins in the very first debates Congress had over the creation of the national debt, the Fed’s precursor, the Bank of the United States, and over the implication of foreign ownership of these institutions.
With an economy addicted to credit expansion and a $16.7 trillion national debt set to rise rapidly in the coming years, and interest owed on the debt, much of it to foreigners, poised to eventually overwhelm taxpayers’ ability to repay it, these debates are no less vital today.
They can be instructive to the American people in deciding whether to continue on the path of increasing debt and dependency on foreign sources of credit and printed money to refinance our obligations.
The First Bank
When the first U.S. Treasury Secretary Alexander Hamilton’s Bank of the United States — the nation’s first central bank — came up for renewal in 1811, these very controversies caused Congress to allow its charter to lapse.
President James Madison had never supported the bank’s charter in 1791 as a member of the House of Representatives, along with Thomas Jefferson, who both had opposed the bank on constitutional grounds. In 1811, Madison had his vice president, George Clinton, cast the deciding vote against the bank’s renewal.
The fight over Hamilton’s bank back in 1791 in many ways had led to the advent of political parties in the United States. The Federalists, led by Hamilton, were in favor of the bank, and the Republicans, led by Madison and Jefferson, were against.
Of considerable concern at the time was the foreign ownership of the bank. In debate over the bank’s renewal, Sen. Henry Clay revealed that “seven-tenths [70 percent] of the stock belonged to British subjects, and that certain English noblemen, and a late Lord Chancellor, were among the very largest of the stockholders,” as noted in an 1830 House report on the bank’s history prepared by Rep. George McDuffie for the Andrew Jackson Administration.
As a result of the objections, the bank’s 1811 renewal was defeated — but not for long.
Within a year, the U.S. was again at war with Great Britain, a conflict that put the nation deeply into debt. Madison, who had famously opposed the creation of the national debt, when in power saw it rise from $45 million in 1812 to $127 million by 1816 to pay for his war.
Per the House report, within three years “the circulating medium became so disordered, the public finances so deranged, and the public credit so impaired, that the enlightened patriot, [Alexander] Dallas, who then presided over the Treasury Department, with the sanction of Mr. Madison, and, as it is believed, every member of the cabinet, recommended to Congress the establishment of a National Bank.”
Quite the turnaround. Opposition to the bank had been an article of faith for Jefferson and Madison’s Republican Party, but then in 1816, Madison signed into law the bill that created the Second Bank of the United States.
Similarly, Jefferson’s renowned opposition to the national debt had suddenly become forgotten when he took office in 1801, going deeply in debt with Baring Brothers & Co. (then Francis Baring and Company) of London to finance the 1803 Louisiana Purchase from Napoleonic France.
The Rise of ‘Old Hickory’
These apostasies led directly to the rise of Andrew Jackson and the splintering of the American political party system, once again over the bank issue and the debt.
It is a sinister joke that Andrew Jackson appears on the 20-dollar Federal Reserve Note, an institution he would have despised. Whoever came up with that idea must have had quite a laugh over the irony. As President, Jackson paid off the national debt and when the renewal of the Second Bank’s charter passed Congress, he vetoed it. The Jacksonians became the basis for the modern day Democrat Party. Those in favor of the national bank became the Whigs.
Besides the arguments against its constitutionality, assisting Jackson was again the specter of foreign ownership of the bank, which was his principal objection. In 1822, foreigners held $3.1 million or 9.1 percent of the bank’s $35 million capital, according to a report of its board of directors. In 1830, according to McDuffie’s report, that figure had risen to some $7 million, or 20 percent of the stock.
By 1832, that figure had again increased to $8.4 million, or 24 percent of the stock, “mostly of Great Britain,” Jackson noted in his veto of the bank’s recharter. Foreign ownership of the bank was indeed rising, quite rapidly. Even though foreigners were barred from serving on the central bank’s board of directors, Jackson perceived ownership as a threat to American sovereignty and independence, and the central bank was again shuttered.
“Should the stock of the bank principally pass into the hands of the subjects of a foreign country, and we should unfortunately become involved in a war with that country, what would be our condition?” Jackson asked, tacitly referring to the financial ruin that followed Madison’s war. Nearly reaching bankruptcy, the War of 1812 revealed what happens when a nation finds itself at war with its creditors.
Overall, the Republicans under Jefferson and Madison had accumulated a mountain of debt to foreign countries during their administrations. Their experiences changed their views and hence public policy about everything from the national debt to central banking, supporting Jackson’s essential point that foreign “investment” is actually influence, and can turn into subversion. When Madison could not secure financing for his ruinous war (even after it was over), he yielded into the pressure to create another central bank in 1816.
16 years later, Jackson would undo it, but the issues of currency, debt, and central banking would not go away forever.
The Revenge of the Fed
Although Jackson’s slaying what was called the central banking hydra liberated the American economy for the duration of the Civil War and the Industrial Revolution, advocates of a national bank and the power to engage in rapid credit expansion would eventually succeed, with formation of the Federal Reserve 100 years ago in 1913 under the guise of preventing bank panics.
Yes, there had been bank panics in the interim, but these did not stop the industrialization of the U.S. economy or the settling of the West. Nor did they lead to anything like what followed.
After all, the creation of the Fed did not stop bank panics. It worsened their severity as is readily evidenced by both the Great Depression and financial crisis of 2007 and 2008. Both crises followed massive credit expansions that were financed by the central bank.
Now, looking at where the Federal Reserve has brought us over the past century, with politicians as diverse as former Rep. Ron Paul (R-TX) and Sen. Bernie Sanders (I-VT) uniting around the issue of Fed transparency in the 2010 Dodd-Frank legislation, it appears that the most recent financial crisis has opened another salvo in the nation’s ongoing Bank War.
Foreign Influence — again
The Fed audit revealed that of the $1.25 trillion of mortgage-backed securities the central bank purchased after the housing bubble popped, some $442.7 billion were bought from foreign banks. These were not loans, but outright purchases, a direct bailout of foreign firms that had bet poorly on U.S. housing.
They included $127.5 billion given to MBS Credit Suisse (Switzerland), $117.8 billion to Deutsche Bank (Germany), $63.1 billion to Barclays Capital (UK), $55.5 billion to UBS Securities (Switzerland), $27 billion to BNP Paribas (France), $24.4 billion to the Royal Bank of Scotland (UK), and $22.2 billion to Nomura Securities (Japan). Another $4.2 billion was given to the Royal Bank of Canada, and $917 million to Mizuho Securities(Japan).
At the time of the bailouts, then-Sen. Jim DeMint (R-SC) supposed in an interview with radio host Mark Levin that foreign creditors threatened to stop lending the U.S. money unless we bought back the mortgage paper.
The whole episode vindicated the fears of Andrew Jackson, who essentially warned that a central bank and a government in debt to foreigners would first serve their interests before that of citizens. So, while Americans were suffering through high unemployment and resultant foreclosures on their homes, foreign banks were made whole with a printing press.
Jackson was proven right. Foreign ownership of U.S. debt in 2008 again had again changed public policy in favor of those interests.
No Other Way
All the while, the people are told that there is no alternative. That we must have a central bank that privatizes profits when times are good, and socializes losses when the banks screw up and extend credit too far. That the economy would fall apart without such an institution.
These were the same exact arguments that were put to Jackson when he questioned the central bank. The1830 McDuffie House report warned Jackson ominously, “it would be utterly impossible to produce so entire a change in the monetary system of the country, as to abolish the agency of banks of discount, usually attendant on great political revolutions, subverting the titles of private property.”
The report added, “The sudden withdrawal of some hundred millions of bank credit, would be equivalent, in its effects, to the arbitrary and despotic transfer of the property of one portion of the community to another.”
Yet without a central bank, none of those things happened. Instead, 1870 to 1913 is seen by many to have been a renaissance for the American economy. In fact, between 1836 and 1913, although there were bank panics, there were no economic crises of the magnitude seen in 1929, 1931, or 2008 when central banks had complete control over monetary policy.
The New Bank War
The bank war has been the fault line of American history. It has led to two of the three shakeups of the party system that have occurred over the past 224 years. It is no mistake that the same issue that divided the party of Jefferson and Madison in 1816 and 1832 divides both Democrats and Republicans today.
With the rise of the Tea Party on the right and Occupy Wall Street on the left in the U.S., or of the UK Independence Party in Britain, or of the Five-Star Movement in Italy and Syriza in Greece, one common thread tying these disparate political movements together is opposition to bank bailouts and the current regime of central banking.
When leftists and libertarians begin finding common ground on an issue as important as money, something is happening. This movement may be in its nascent stages, but it is sending shockwaves through the current political system all over the world.
The political success of central banking over the past century — all opposition had been nearly wiped out — means that when economic contractions brought on by excessive credit expansion occur, as it has today, there are no other institutions to blame for the misery that follows.
Central banks have had their time, but now the pendulum is swinging once again. Where it ends is anyone’s guess, perhaps a Rand Paul candidacy, but as in the past, this issue has the potency to transform and realign American politics.
Bill Wilson is the President of Americans for Limited Government. Robert Romano is the Senior Editor of Americans for Limited Government
January 4th, 2013
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