The Gold Standard Before the Civil War

0:00My general theme today is the gold standard in American history and banking in American history. There's several myths which have been propounded by most economic historians, if not all, I wouldn't say all the most, until recent years. And the two most important myths that I want to focus on is the first one, which you've all probably heard if you've read about colonial monetary history, is that the colonial America suffer from a great shortage of species, shortage of gold and silver. And therefore, because of this shortage, colonial governments had to print lots of paper money to make up for this, for this thief deficiency. That's one myth, which I think we will examine.

0:51The second myth, which has a whole bunch of subheads, which will take me more than enough time, is the myth of the central banks in the United States. The role of the central banks has always been to restrain the evil expansionary impulses and tendencies of private banks. And the private banks or free banks, if they're allowed there ahead, tend to inflate too much, and therefore you need the central bank as a wise patron on high or god out of the machine to fix things up, to control them and to moderate them, restrain their expansionary tendencies. And a sub-variant of that, of course, is this is true.

1:38That means that the private banks or the state banks, as they were called in American history, because most of the banks were chartered by the states, that the state banks must have been chafing at the bit. They must have hated the central bank and wished for its extermination. The brunt of my talk is that the exact opposite has been true in all these cases. In the case of the central bank, the state banks were all for it and fought hard for its continuation or establishment. OK. Myth number one about colonial America. We start off with, it should seem peculiar to an economist. It's characteristic that most historians don't know anything about economics, most economists don't know anything about history.

2:28For an economist, it sounds very peculiar, it should be a red flag of the bull, to start talking about a shortage of specie, and that colonial America suffered from a terrible money shortage. Why couldn't we buy specie? I mean, there was, after all, transportation going back and forth, there was plenty of trade back and forth to Europe, there were plenty of coins, silver and gold coins around, Why couldn't we simply buy them, transport species to America and use it? That's the first thing we should, you know, set off a light in one's noodle. It's true that the British government, suffering from mercantilist fallacies, as most American governments did too, you know, actually part and parcel of the same British Empire, passed a law that the Americans' colonies couldn't have mints, and also try to keep British species in Britain.

3:20However, we didn't need British species. As a matter of fact, most of the coins that we used were Spanish silver dollars, which we can import from Spain. And we also used later on Austrian Maria Theresa sovereigns, units, etc. So we didn't really need English coin. and we used Spanish and other foreign coins, Portuguese coins, Austrian coins, etc., etc. So the first problem then is if there was a so-called shortage of species, why didn't we buy any? Why didn't Americans simply buy this stuff from abroad? So it turns out, because whenever an economist hears the word shortage, he or she should immediately start saying, well, what do you mean shortage?

4:05There is no shortage in the free market. There's plenty of scarcity in the free market, as we all know. There's no shortage. There's no situation you can't find something. For example, Rembrandts are very scarce, quite obviously. On the other hand, there's no Rembrandt shortage. I haven't heard anybody belly-yanking about a Rembrandt shortage. If you want to pay a million and a half dollars, you can find a Rembrandt to buy. So the question then is, what's interfering with this mechanism that doesn't permit shortage? and permit shortage. As a matter of fact, a shortage is only the result of government intervention of a maximum price control. If, for example, a government suddenly decreed for some obscure reason, of course, you people in the heart of government, no better than I do, why would they do such a thing, they might suddenly decree that Wonder Bread, which is now selling at something like 89 cents a loaf, should only sell for 10 cents a loaf in order to help the American masses eat their Wonder Bread.

4:59Wondered Bread, right, because every kid deserves at least a loaf a day. So if the government then decreed this and said, okay, from now on, as a maximum price control of 10 cents on every loaf of Wondered Bread, there would be an instantaneous shortage. In other words, people would rush out and buy Wondered Bread for a dime a loaf. They'd shift from Silver Cup and Tasty Bread and Pepperidge Farms and all the other goodies, because it's not only a dime. In the meantime, the Wondered Bread manufacturers would stop producing Wondered Bread for a dime a loaf. So we'd have very quickly a Wonderbread shortage, couldn't find it on a shelf, a black market would then develop with people of mysterious folks with raincoats on shady street corners offering hot Wonderbread for five dollars a loaf. So the whole phenomenon of a shortage, a shortage only exists, I think it's safe to say, I figure to say that a shortage only exists in the world when there's a government maximum price

5:55control below the free market level. So therefore, the constant complaining about a shortage of species in colonial America should let one lead one on to think, well, there must be some government involved somewhere, and indeed there was. Specifically, we have Gresham's Law, which is sort of a charming, which is, unfortunately, this is sort of a side point, but I think it's an interesting one. Gresham's Law is almost always stated incorrectly. It's stated, the first person I can think, I've been able to find, I did some studying of this, who enunciated Gresham's Law, was not Gresham, of course, I mean, it was way before Gresham.

6:44It was Aristophanes, the great Greek satiric playwright. His marvelous play, The Frogs. And in The Frogs, he marked it. In other words, the implications of something peculiar about money Where if a bad money, a crummy money, a debased money, the appreciated money, if it's circulating side by side with good money, say gold, then somehow gold will disappear and paper will out-compete it, or bad money will out-compete it. And this is very peculiar because usually on the free market it's just the opposite. Usually good products will out-compete bad products. If you have a radio that doesn't work competing with radios that do work, The non-working radio is going to disappear pretty quickly, even without a OSHA or whatever, or the government bureau. So, but unfortunately, Aristophanes stated it incorrectly. He said, he had a little poem about it.

7:34He said, first of all, he said, in our republic, bad citizens are preferred to good, just as bad money circulates while good money disappears. From Aristophanes, it's interesting, you can say that now even. Then he had a little poem where he said, For your old and standard pieces, valued and approved and tried, here among the Grecian nations and in all the world beside, recognized in every realm for trusty stamp and pure essay, are rejected and abandoned for the trash of yesterday, for a vile, adulterate issue, grossing counterfeit and base. Okay, so the first, as far as I can find out, first proper statement of Gresham's law, which stated it correctly, was by the great 14th century French physicist, astronomer, and an mathematician, Nicolo Rem, who stated it correctly.

8:20He then went on to become bishop of Lisieux. And essentially he's saying that if the, well, he said quote, if the fixed legal ratio of the coins differs from the market value of the metals, the coin which is underrated entirely disappears from circulation and the coin which is overrated alone remains current. Beautiful statement. Essentially in other words, if the government puts, if there are two monies circulating, if the government puts a maximum price control on a good money, and a minimum price control between the two of them on the lousy money that those people will then pay their debts and so forth and crummy money and hold on to the good one, either hoarding it or exporting it abroad. So in the 14th century, we already had that position and the great astronomer Nicholas Copernicus, who was also a canon lawyer, artist and physician, was asked by the King of Poland to offer, to offer proposals for currency reform.

9:13Everything was messed up on the currency. So in the early 16th century, he set forth an essay on money, which he used the correct version of Gresham's law, saying if the government overvalues one coin or one money, undervalues the other, undervalue one will be hoarded, melted down, or exported. And the quote, the degraded coin alone remains in circulation. Okay, so he had the whole thing. Gresham himself apparently did denunciate Gresham's law, indeed, but he was not the one who made the famous memorandum on it, which was really Sir Thomas Smith, who was a big, big shot tutor official and bureaucrat and financier. At any rate, so the true version, the correct version of Gresham's law is simply an application, as Mises pointed out many times, an application of the theory of price control causing shortages to money, The two monies operating side by side.

10:08Well, what happened in colonial America is precisely the working out of this, of this, of the Russians' law and action. The, for one thing, the, what the colonial governments did started to undervalue, undervalue species and overvalue their own crummy pound notes that the Massachusetts and other governments were putting out. In other words, they engage in continuing debasement of their own currency units and artificially overvaluing, excuse me, undervaluing a specie. So the result was a specie disappearing and too much Massachusetts paper and not enough specie in circulation.

10:56So the whole, I have a written paper which goes through all the statistics on this, I'm sure there's nothing more deadly in the world than hear statistics being read, so I'll spare you all that. At any rate, that's the, that's what happens. The definition of the shilling is also being manipulated, so the shilling will have more and more, less and less weight to it, less and less weight of silver, Massachusetts shilling and the Connecticut shilling, each one competitively debasing in order to try to subsize their exports and limit their imports and try to bring species into the country, into the colony. In either case, it really worked very well. While this was going on, the two important things happened on the history of money in the 1690s.

11:42It was a dramatic decade for the history of the world money. One thing that happened was that the governments discovered government paper. They hadn't used it before. As far as I can see, outside of China, which of course invented both paper and printing long before we did in the West and therefore went through a whole cycle about several centuries before the West did. But of course nobody knew what was going on in China, so it was a totally isolated kind of situation. Outside of China, there had been no government paper money issues before 1690, 1692. The, actually it was 1690, the, there had been bank paper, bank notes, paper bank notes and government coins which the government was progressively debasing by juggling standards of weight. But there haven't been any actual government issues of paper money.

12:28This, the invention of government paper then belongs to the credit or the blame of Massachusetts, the royal government of Massachusetts. What happened was that there was a custom in those days for Massachusetts troops to go out and raid, plunder the French in Quebec, and actually in Nova Scotia. The French were very productive fishermen. They didn't have too many people up there. They had a lot of fish and furs and so forth. Every three or four years, Massachusetts troops would go up there and plunder it. And they'd come back with a loot to Boston and auction it off and pay the soldiers out of the proceeds. Sort of a pirate expedition, the best way I can describe it. And this was one of the customs of Massachusetts, which we don't hear about, you know, by centennials.

13:17But anyway, and the French being outnumbered usually lost. Well, this time the French won, and this was before 1690. It was a plunder expedition. We'd go out there and steal the fish and the furs. And they had a good fort there, and they were ready for us. And anyway, they won. So the troops come back, not only with no booty, no loot, and also not getting paid. One of the great insights we have in history is that in the course of history, when soldiers don't get paid, they get very, very edgy. They have a lot of edgy people with guns. This makes the government very upset, very worried, and they don't like this. So the Massachusetts government is wildly looking around for some way to pay the soldiers. And they didn't have any credit, they didn't have any gold.

14:04As usual, they're in bad fiscal shape. That's true of almost any government. So they decide, why don't we just issue paper notes, call it pounds, and to pay them with that, hope this works. So, in December of 1690, Massachusetts issued the first government paper money in the Western world. Seven thousand pounds of paper and notes to pay the salaries of these soldiers. Now, they couldn't issue just, they couldn't just say paper. They couldn't just say pounds because they wouldn't be accepted. So, Massachusetts made a solemn two-fold pledge, you know, about pledges in politics. Two pledges, which they would ever swear, ever always to keep. One, that they redeem the notes and speach it in a few years. A few years is a little vague, but you know, a few years. And two, they would absolutely make no further issues with paper money.

14:50This was it, 7,000 pounds of men on a quip. Well, as usually happens in this situation, paper, the discovery of paper money is a wonderful thing for the government, because nothing much happens at first. I mean, the world doesn't come to an end, you wish you had paper, you pay off your debts, hey, this is great. Prices go up a little bit, but not really too much at first. So it seems to the government they have a magic, sort of magic open sesame here, They can solve all the problems, they don't have to increase taxes, they don't have to, nothing much would happen, just print money and spend it, whoopee. So in a few years the idea of redemption faded away, I mean it was forgotten, the idea of species redemption. And the pledge limit itself evaporated only a few months, as a matter of fact as early as February, that means two months after the issue, they swore up and down 7,000 pounds and that's it forever.

15:38They said the 7,000 pound issue would fall on far short, as they put it, far short of their needs, right? So they proceeded to issue 40,000 pounds of new money. Oh, wow, this is fantastic. Rev it up, kid, in order to repay all the colony's debts past, present, and whatever. And then again say, this is the last, this is it. From now on, this is the final issue. Of course, they kept issuing forever, for many years. and only one year the paper money depreciated by 40 percent and at that point two pamphlets were written I don't know the names I think anonymous pamphlets attacking the public this is interesting attacking the public for being delinquent and satish as they call it for for for buying these notes and only accepting these notes only 40 percent at 40 percent off they should be at par they said after all the government is a democratically elected government this government of their own choosing they must therefore their honor

16:34are bound to consider these paper money at par with specie. So, of course, these exhortations didn't work. At that point, a year later, after the exhortation didn't work, this always happens, by the way, when voluntary exhortations don't work, when the government officials say, OK, you and you stop spending to stop inflation, let's say. And that obviously doesn't work. Then they say, OK, from now on, we take off the gloves. You know, the old joke about Hitler, OK, from now on, no more Mr. Nice Guy. So, a year later, they're giving them a chance to voluntarily accept the depreciated notes at par. The Massachusetts government made the paper money compulsory legal tender for all debts at par. And then, of course, specie starts disappearing like mad. And they kept issuing more paper, and the paper kept depreciating, and the silver kept disappearing.

17:27Okay, this, and then they try to public land bank, saying the land is backing it and still issuing paper notes, doesn't make much difference. The result was still depreciation, rapid inflation, disappearance of specie. This continued, this was then copied by most of the other colonies, if not all, and resulting in a quote, shortage of specie, unquote, because government said, here we have 40% depreciated notes, you must accept this as part of specie. When parliament finally prohibited all paper money issues in the 1750s, the shortage was eliminated. The shortage suddenly disappeared, as often happens.

18:16That's the shortage of specie bit. The next major point is about central banking and their relationship with the private banks or state banks. As I said, the usual contention or myth is that the central banking was necessary in order to restrain the inflationary tendencies of the private banks, and therefore the private banks were really against the central bank and tried to eliminate it. My contention is the result, just as the true facts, so to speak, just as in the case of the shortage, were just the opposite. True facts were that the central bank was put in by the banks in order to inflate the money supply and enable them all to inflate. In other words, the central bank acts as a cartelization device just as the Farm Price Support Program, the Federal Farm Support Program since 1929 has acted as a giant cartelization device for farm products so as to cut production and raise prices or try to cut production and raise prices.

19:20Similarly, the central bank acts as a bank cartel device to enable all the banks to inflate together so that the natural free banking checks on inflation would be eliminated. And therefore, the private banks more or less, usually either both defended the creation of the banks, the central bank, and fought against their abolition in contrast to the myth, the exact opposite of the usual historical myth. And as I said about the first met, the real story was of course that the, instead of saying that there was a shortage of species and the governments had to issue paper to fill in the shortage, it was precisely the government issue paper that created the shortage. So this is, similarly, the banking, central bank situation is the exact opposite of the usual historical story.

20:07Okay, we start off with central banking. First of all, during the Revolutionary War, there was no bank. I mean, banks did not develop at that point, or they had disappeared. The first commercial bank in the New Republic was also the first central bank, the Bank of North America. This was a plan fulfilling the Nationalist program. There was, just to say very briefly about the American Revolution. The American Revolution, such that it consisted of two groups of people, two groups of ideologies, two ideological, very diametrically opposed groups. One group, which was a majority of the public, I think there's no question about that, which mostly in the rural areas, subsistence rural areas, believed in a very minimal government.

20:59They believed that the American Revolution was a libertarian revolution. The object was to throw off big government altogether, not just the British government, but any big government, and to eliminate almost all government authority, cut taxes down to an absolute minimum, cut the budget down to absolute minimum, have free trade, free markets, gold or silver standard, no paper. In other words, extreme laissez-faire or libertarian program. This was basically the so-called Anti-Federalist position, which was held by the majority of the public. On the other hand, you had a small but powerful group of people, the Nationalists, who call themselves the Federalists because it sounds better. The Nationalist program, which believed just the opposite.

21:46The Nationalists wanted to recreate the British Empire without Britain. In other words, recreate the entire structure of a big government and mercantilist policies, essentially back to the old mercantilist policies. policies, with high tariffs, big public works program, heavy public debt, and high taxes to pay for the public debt, and a pay off of public debt, and a central bank which would inflate the money supply in an orderly manner, of course, orderly means money by the government, and using the cheap money to subsidize favored business groups and favored projects. So basically, the Nationalists were essentially the embryonic development of what we have now. It's just sort of looking back and saying, okay, this is the beginning of the low-fair, warfare state.

22:34So they wanted a British Empire without Great Britain, and they wanted a very strong president, a very strong federal government, and a very strong president as the chief executive, as a quasi-monarch, if not a name, then a fact. So we have then the so-called Hamiltonian vision. It was really a vision of Robert Morris, the first central banker, and Hamilton was his disciple, and Morris was his mentor, versus the so-called Jeffersonian vision of the ultra-minimal government. Okay, Morris, during the Revolutionary War, for various reasons, became an economic and financial dictator, a czar of the whole system. Morris has been called the financier of the American Revolution.

23:19That's the name which has been attached to him. Actually, as usual, it's just the exact opposite was correct. The Merkel Revolution financed him. He stole millions. It's unbelievable. He was the, first place, the accounting. I mean, people, politicians steal now, of course, but in those days, there was no rigorous accounting methods. There was no independent audit. There was no GAO. There was no nothing. We still don't know how many millions he stole. Basically, what happened was he got, He was a very wealthy merchant in Philadelphia. He became the economic financial czar of the Continental Congress. He then parceled out all the contracts to all the war contracts, printing money or borrowing money, parceling out all the war contracts to his own, either his own firm or his own partners or his own associates.

24:13You have enormous things where Robert Morris buys stuff from France and Robert Morris' ships and the total interpenetration of the treasury, treasury funding, treasury bank accounts, so to speak, and his own bank account. It was almost impossible to clear it up. Anyway, minions got siphoned from the taxpayer or the person who pays them for inflation to the pockets of Robert Morris and his associates. So one of the things that Morris was the chief nationalist, he was the main person to have this great vision of a new British empire without Britain. And one of his visions was to have a central bank which he, of course, would run. And he, during the Revolutionary War, he created, he chartered, he had Congress charter the Bank of North America in Philadelphia, which is supposed to be the first central bank.

25:00It was also the first commercial bank, and one of the privileges which the bank got was no other commercial bank was allowed to exist for at least 20 years, except this bank. In other words, this was a monopoly bank, okay? Also, the treasury would put all of its deposits in this bank, the bank notes would be receivable in all taxes to the government, federal and state governments, on par with specie, and etc. etc. And of course, all the federal debt would then be purchased by the bank of North America. In addition to that, the public debt, which Morris and his friends had already purchased, could be deposited in the bank, and then it would become banking from war bank notes.

25:48So Morris benefited six ways this Sunday here. As a matter of fact, he was supposed to have a certain amount of specie capital in the bank. He didn't raise enough species. What he did is he took a loan, France loans $462,000 in species to America for the war effort. He appropriated it. Morris appropriated $264,000 of it, put it in the back of North America to meet the legal requirement for species capital. So it's great if you can get away with it, I suppose. After the war, after a year or two, when the war was coming to an end, he began to lose political power and he quickly disconnected the Bank of North America as a central bank. It became then a straight commercial bank. He divested all the government funding from it.

26:37By the way, I think justice is not always triumph in the world, as you all know. In the case of Robert Morris, however, justice triumphed. He died about ten years later in debtor's prison, totally bankrupt in debtor's prison. Presence, I think is really met as just desserts. However, being a man in favor of the public debt, private debt and everything else, however, even with Morris's coming to a defeat, his disciple Alexander Hamilton continued on, and of course the Constitution was driven through the country in a blitzkrieg vote in the middle of the winter. This is very important because those days, first of all, How many roads then? I mean, not, I would say no roads, but not many roads, okay? So, as communications were very sparse, to say the least, Federalists had control of all the cities, and they also had control of the post office. And by the way, they used the monopoly post office to their advantage.

27:35They deliberately speeded up any communications between Federalist leaders, and they withheld communications between Anti-Federalist leaders. So it would take eight months for a Virginia Anti-Federalist to send a letter to an Anti-Federalist in Massachusetts. It took like a week for the Federalist to communicate. So at any rate, so they used this advantage. They pushed through the stuff in the winter when it was icy and the roads were no good. And the Anti-Federalists couldn't communicate with their people who were essentially subsistence formers in the backwoods who found it very difficult to mobilize. So they used the Blitzkrieg approach and it was quite effective. At any rate, even so, they bought out most of the legislatures. In New York, for example, New York voted two to one against the Constitution. Two to one.

28:22When they got to the state ratification conventions, which supposed to decide, half of them shifted their vote, or many, enough shifted the vote to ratify, even though they won their election on the basis of a pledge to vote against the Constitution. They were bought out, literally and figuratively. At any rate, as soon as the nationalists get into power, they push the Constitution through. One of the first things they did is set up the Hamilton Central Bank, the first bank in the United States. One of the major reasons according to Hamilton was, quote, to overcome the alleged, quote, scarcity of species. We're back again, being used now to justify central bank. At any rate, to speed things up a bit here, the historical myth is that the first bank of the United States was extremely sound and they repressed the state banking inflation, et cetera, et cetera.

29:16It was just the opposite. They were not very sound. They inflated quite a bit and they spurred state banks to come into action. After the first bank came in, the result was a lot more state banks, a lot more inflated bank credit. When the Jeffersonians got in, this is the old story, of course, by the way, you all know too well, the Jeffersonian movement was supposed to be dedicated to smashing this whole apparatus, smashing the Monopoly Supreme Court, the central bank, the tariff and all the rest of it. As soon as they got in, as soon as Jefferson gets in the power, he becomes a, quote, a statesman, unquote. In other words, he sells out. It becomes what they now call pragmatic. And so what happens is the Democrat or Democrat-Republicans, half of them become pragmatists and they become very close to the moderate Federalists, that means those who didn't want an absolute monarchy.

30:10And so what you have in between 1800 and 1815 or so, you have an amalgamation of the moderate Republicans and the moderate Federalists in one big centrist blob, essentially continuing and accelerating the whole bank credit inflation with the First Bank. The First Bank Charter was up in 1911. It was a big fight, whether it should be repealed or not. Madison, who was the epitome of the centrist moderate, of the pragmatic moderate, opportunist moderate, was the one in favor of it and tried desperately to renew the bank. But enough people, enough disgruntled Federalists, plus old-fashioned, what they call old Republicans, and these hardcore Jeffersonian types, swung enough votes to defeat it by one vote in the House and in the Senate.

31:00So, at that point, we could say, well, we finally did not have a central bank, after the first time in American history. Didn't we have free banking then? No, we didn't, because what happened then was that we got into the War of 1812, and the War of 1812 was extremely unpopular in New England, or the War with England. New England had most of the manufactured goods, most of the armament equipment, and most of the banks. So how was the government, how was the Madison administration going to finance the war effort? The way they financed it was by encouraging a whole bunch of new banks, which suddenly popped up in Pennsylvania, Kentucky and other states. Essentially money factories with almost no specie capitalists, printing paper dollars and using it to buy U.S. government bonds.

31:48So, this is a sort of a happy situation for the banks. I mean, all they had to do is to print new money, and they buy the bonds, and the taxpayers are pledged to pay them back, quote-unquote, plus interest. I mean, this is a good deal if you can work it. You create new money, and then for the services you perform in the country by creating new money, you then pay back, you load it on the taxpayer for the next 30, 40 years. So, what happened, however, of course, is the government, the administration had to pay, use the money from Pennsylvania, Kentucky, etc. to buy stuff in New England. New England banks did not inflate. New England didn't want to pay for the war effort anyway. New England banks then called upon the inflated banks for redemption. They didn't have the money. How are they going to pay in specie?

32:37At that point, we had a big watershed situation in the summer of 1814. The banks were essentially bankrupt, means all the banks outside of New England. The federal government and state governments then said, okay, we will now permit the banks to suspend specie payments. That means to continue an operation, continue lending money, printing money, lending it out, and forcing their debtors to pay them back. But they didn't have to pay their depositors or their note holders. They were relieved from responsibility, a contractual responsibility, of paying their paper money in specie. So, of course, they love that. More banks than pop in that action. And this continues, this situation of fiat individual paper. I mean, it's just like I could print dollars and lend them out. It's actually something like that. This situation continued for two and a half years, long after the war. After the war was over, the mass administration, now the Monroe administration, was confronted with a choice. They had to do something. They couldn't have a permanent system

33:37system of a hundred banks in the country each issuing dollars not having to pay for it. It's obviously not going to work for any length of time. So what could be done? Well there are two courses were offered, two policies were offered. One was the the old-fashioned Jeffersonian policy, so-called Old Republic, in which some of the Federalists now went along with in order to make trouble, which was a policy of forcing the banks to redeem or else go go out of business, force the banks to redeem and gold and silver or else get out. This however was not the sort of thing that moderates quote unquote of any staff enjoy. And so the Monroe administration made a deal with the banks to create a central bank, new central bank, new second bank in the United States, which would then validate, which first of all would validate all the inflated paper which had been going on for the last four years, three years, and also continue inflating the money supply, which they did.

34:37So the second bank was put through and it was then used, then it started inflating like mad. It printed six million dollars in these areas where the banks were shaky and it started printing like mad, inflating like mad, thereby creating a big boom in the first big depression in the United States history in 1819. Once again, the state, I should underline one thing here, the state banks were all for it. The state banks were all in favor of the first bank of the United States, they were all in favor of keeping it, they were against abolishing it. They were also all in favor of creating a second bank, because otherwise it would have had to go under. Also a couple of words that should be mentioned here as instrumental in this whole operation.

35:26The first Bank of the United States, the president was William Bingham, who was the Philadelphia merchant, who was the partner of Robert Morris, thereby continuing the Philadelphia oligarchy connection, and during the war of 1812, Stephen Girard, who was the second wealthiest person in the country, he was a Philadelphia merchant, was heavily invested in war debt, he bought a lot of government bonds, and he was also heavily invested in the first Bank of the United States. He then decided he wanted to create another second Bank of the United States, in the United States, in order to, one, have a second bank buy all of his award debt, you know, buy all the government bonds from him, which would be very useful, until he could then invest heavily in the second bank. So, Gerard, being politically powerful, teamed up with John Jacob Astor, the first wealthiest person, who was also heavily invested in award debt and bank of the United States bonds, stock.

36:20The two of them got together and pushed through the Manus administration, the nomination, the appointment of Alexander Dallas to be Secretary of Treasury from, again, Philadelphia, pal of theirs. Dallas was a lawyer for the Girard interests. And Dallas puts through the Second Bank and retires, his job having been accomplished. Gerard also got, as president of the bank, William Jones, another Philadelphia cronium there. So they have the whole Philadelphia connection, which continues on, by the way, for another 30 years or so, and running the whole central banking operation. The, okay, the, another person I should also mention here, probably the top moderate, quote-unquote, moderate Jeffersonian Democrat, Republican in the country, by Senator Samuel Smith of Maryland, a very powerful figure.

37:11Smith, in the course of the inflation of the Bank of the United States when it first got started, there was also outright cookery going on, enormous number of outright thievery by the Baltimore and the Baltimore branch of the bank of the United States. I've siphoned off into the pockets of the guy named Buchanan and his clerk. Who was Buchanan? Buchanan was a partner of Smith and Company, Smith-Buchanan Company, the major mercantile firm in Baltimore which is owned by Samuel Smith, his senior partner. Now since his two, his senior partner and his clerk were the two biggest crooks in this operation, I figure if Buchanan and the other guy were crooks, could Samuel Smith have been far behind in this operation?

37:59The Bank of the United States continues on after the creative depression and Nicholas Biddle then becomes the head of the bank, again part of the Philadelphia oligarchy, the last in the line which started with Robert Morris, and when Andrew Jackson comes in he starts a titanic struggle which finally divests, separates the, eliminates the central bank and divests the government from the banking system. which Van Buren and Polk then completed. It should be pointed out something we didn't know until fairly recently is that the state banks basically were favors of the Bank of the United States, wanted to continue and favored Biddle on the famous fight against Jackson.

38:45So why did Jackson do what he did? Because basically he was a libertarian, he was a hard money advocate and libertarian. He read, he and his associates had read all the classical economic literature, the pre-Mises literature so to speak, and were convinced by it. They also were stung by By the panic of 1819, they realized that bank credit and bank expansion and contraction of credit was responsible for the business cycle, and they were against it, and they thought it was ruinous. And so you have, for the first time, classical liberal and libertarian ideologues, so to speak, responsible for a mighty and titanic reform. The next step, as far as they were concerned, was to eliminate the state banks too, and have a 100% gold system. System. They didn't accomplish that largely because the slavery question split the Democratic Party in half by the late 40s, late 1840s. Okay, the next, I just have time to say just very briefly about the Federal Reserve System. I could go on for another couple of weeks

39:42on that, but the Federal Reserve System is a very similar story. In other words, the Federal Reserve System was put in by big banks. The bill was written. It took a few years They were used for jockeying around for position, and for exactly what sort of laws should be passed, but all of them, all the banks were in favor of, all the large banks, were in favor of the Federal Reserve system, in order to provide, quote, elasticity, unquote, of the money supply, in other words, in order to permit inflation of money, expansion of money supply, which they couldn't do very much under the National Banking System. They always ran up against the stone wall, especially during recessions. They wanted a sluice gate, a wonder of last resort, a centralizer of reserves, The Federal Reserve, I think, very happily confirmed their judgment and has done this ever since.

40:54The Federal Reserve is responsible now, of course, for continuing and accelerating inflation, in between, responsible for big depressions. As you all probably know, the Federal Reserve was put in, in order to stabilize the business cycle, supposedly, as one of the supposed advantages, to eliminate depressions and inflation. Instead of that, we got the largest inflation, most chronic inflation, and the biggest depression in American history, since the Fed has come on the scene. Thank you very much, Murray. It was a very stimulating paper. Having said that, I will now comment on it.

41:45My comments are going to be brief, and I'll just supplement a little bit of what Murray has already suggested and criticize a little bit to throw a few cream puffs. He and I analyze things somewhat differently. We always come up with the same conclusion. That is the Federal Reserveum Delendum Est, just as the elder Cato said about Carthage. I think we ought to have a new law besides Gresham's law, which would say that in a competitive market, where money is supplied by the private enterprise system and free of government, that good money would drive out bad money because after all good shoes have driven out bad shoes and good food and good clothes have driven out less good and less good food and clothes and what we intuitively should expect from private enterprise is that it would also provide us with of the Good Money.

43:08We should note too that Gresham's Law only possible, as Murray emphasized, when government issues money, more particularly when the government imposes the coercion of legal tender. Because what legal tender says is that you must accept the money, whether you want to If you don't, you'll be a creditor who is deprived of the interest due that he would otherwise have received. That is, the debtor can put up a sum of money with a court of law and absolve himself of further debt when the money is legal tender. I think we should note, though, that under the classical gold standard, when governments issued paper money, the means by which the money became less good was by the increase of the paper money causing prices to rise.

44:16However, the price of the gold, which was fixed by law under gold standard rules, could not rise and therefore would be forced out of circulation because it would become more valuable as a commodity than it was as a money. The paper money would then inflate the system, drive up prices, and if the government were to practice stiff upper lip policy, it would bring, it would reverse the process after the emergency that provoked the issue of paper money and would bring the price level back down again to the point where a resumption or redemption of paper money for gold or any other money for gold could be realized.

45:21Now into this came, into these monetary systems that were primarily gold standards, came governments with, as Murray suggested, central banks. But I would quibble with him here that the banks that came in that he referred to, particularly the first and second banks of the United States, actually came in as central banks, that is, with an avowed intent to manipulate the quantity of money in ways that were fashionable with the political elite of the time. They did come in as public banks, as banks for the fiscal operations of the government, and that set the stage for them to become central banks.

46:12But I don't think that they were perceived at the time as central banks. In fact, in many of the debates that involved the first and second banks of the United States, The central banking function, the manipulation of the monetary system in a deliberate fashion, was effectively proscribed. Well, then in the inflation of around the war of 1812, one thing that Murray has either sublimated or overlooked is the fact that the government was issuing paper money in the period between 1812 and 14, and causing this classic type of suspension of specie payments.

47:17That is, it was issuing what were then called treasury notes. They were euphemistically referred to as loans, but they had all the properties of money. They looked like currency. They were treated like currency. They had limited legal tender powers because they were usable as money for all government dues and all government debts and payments by the government to its debtors. They were, however, in large denominations, $100 was the lowest for a while, and then $20, and then finally smaller denominations, but most of them were higher denominations and were held primarily by banks as reserves, on which the banks then expanded credit and common money.

48:18So the government's provided, as it's doing today, too much monetary base material. And then the banking system used the base to inflate common money, and then got the criticisms of the government for having done so. Any scapegoat will do when the government is to blame. Well, the primary reason for the inflation, however, was actual government issues of paper money and not the number of banks that grew up around it. That was simply an administrative feature that was a result of the government's issues and not a cause of the inflation.

49:13in basic terms. Finally, the inflation was reversed, not by any second bank of the United States, but particularly by the stiff upper lip policies of William Henry Crawford, who was Secretary of the Treasury at that time, and reversed the outflow of Pay for Money by taking it in through fiscal surpluses and burning it up. Fiscal surpluses are something that you've probably never heard of, certainly not if you're less than 50 years old.

50:02But surplus means that there's more coming in than going out. Well, that's all, those are all the comments I wish to make. I think maybe some of you might have some questions or comments, or Murray may want to respond to what I've said, yeah? I think it overlooks the main problem. In other words, the problem is that the dollar has become, or the franc or the pound or the mark, The dollar has become the unit of currency. It started off, all these currencies started off as units of weight of gold or silver.

51:02The dollar used to be one-twentieth of a gold ounce way back. And so it starts off as a gold weight and then gets used as a currency name for hundreds and a couple hundred years. People are then used to it and they use it as a currency unit even when the gold is eliminated. Okay, that's the problem. So the money, the United States' money is the dollar. They love the dollar. They're crazy about it. Even in hyperinflation, they'd probably stick to it. So I don't think, I mean, if I were allowed to issue Rothbards or Dick Timberlake were allowed to issue Timberlakes, I'm in favor of being allowed to issue them. I don't think anybody would take them. You have to be pretty balmy to take them, right? So that's the problem. The problem is we're stuck with dollars. The dollar is our currency. We have to get the dollar back. I was in favor of denationalizing the dollar. That's the key. That's the key. You get the dollar out of the hands of the government by tying it to gold and getting the gold out of Fort Knox, abolishing the Fed, and bringing the gold in the hands of the public.

51:53Then you can compete. You can compete with Timberlakes or Platinum or North Barge or anything. But the point is, I think gold will win out in the competition, the free market competition. In order to be able to do that, you have to have the gold dollar back, denationalize the dollar and the gold at the same time. All the rest is really pie in the sky. It's not applicable to our situation. Yes, I would essentially agree with that. Somewhere you have to start with some kind of definition. And under a pure commodity, money, you can let people decide whatever commodity they want to be money and then simply denominated by weight. That is, allow them are not the denominated by weight, but the essential ingredient of a sound money is to get the government out of its production, by one means or another.

53:03How would you comment on all of it? Do you have any questions? There is an American issue, an American cause. I know that there is an issue of virgins, that the government has banned the issue of parks. How do you do it?

53:33and all kinds of competing monies in. And I think we have to allow that we are not guilty of the synoptic delusion, that we can imagine every facet and ploy of private enterprise that would take place. I think myself that there would be a few dominant monies that would come into existence through enterprisers that would know what they were doing, and in the same way that enterprise produces other goods and services. It would be something like a competitive telephone system. And we should note that even the private monopolistic telephone system reduced real cost of services consistently over the decades.

54:29So even if we had a single private monopoly of money, we would perhaps see the same thing. But I don't want to be guilty of the synoptic delusion myself. I don't know just how it would work. That's one of the beauties. If I can add to that a second now. Before 1913, that's exactly what we had in the United States. We had banks issuing paper notes as well as deposits. And this meant that, for example, if people If you want to get more cash on hand for Christmas, they go to the bank, they cash in some of their demand deposits, get Chase Bank dollars, and use that for tips and presents, etc., which means, because now when you do that, there's a contractionary effect, the Fed has to pump in reserves to offset it, you don't have to pump in anything, because demand deposits and notes are really basically the same thing, they're both obligations to pay in specie or in cash, so they did exist and worked pretty well, and when banks didn't do too well and they would start depreciating, the notes would start depreciating,

55:22and comparison to other notes and they pretty soon pass out of existence.

56:22and eventually the zeros. That was out, the paper money route essentially self-destructed after about three years. Then they were stuck, then they went to the public debt route and they started, you know, finance and issuing bonds which caused a great deal of trouble. Now it's true that this uh... how do you finance the war effort? Fortunately the good thing about the paper money was it left no legacy, it just disappeared and that was it. It became worthless. There was no legacy for the future, which the public debt did have. The other hand, see, if we fought the war on guerrilla principles, this is a whole, I don't want to get into the military history of revolution, it's one of my favorite topics, if all the battles that we won were won on guerrilla principles, all the battles we lost were won on orthodox 18th century army principles of marching into the field and getting shot, which is Washington's favorite, so Washington lost every battle until the end.

57:15Now, if we fought the war on guerrilla principles, you wouldn't need a lot of taxes or money because it's self-financing. The farmers pick up a rifle, they don't shoot the British, they go back on the farm. You don't need big taxes, a big sitting army in Valley Forge freezing to death. You don't need any of that stuff. You see, if we fought on those principles, one we would have won faster, until we wouldn't have had this legacy of big public debt and inflation and taxes at the end.

57:45I'd like to get back to the thing that I was trying to talk about. Well, actually, money is the medium of exchange, and it makes it much easier. The people don't have the power to lend themselves, and they have the power to make money. But if there's a scheme, and it's going to turn up, it's going to be hard. and a grade of 16% to all, and a time promise of 25 hours to not be as impoverished as it is today. Now, the method of meeting prices is just as bad as stuff that isn't in the same country, as stuff that isn't going in the same place, it's quite confusing. We can go to the supermarket and pay a $30 check on Chase Bank.

58:45It's a competition with Citibank, ChemBank and all the rest of it. There seems to be no problem. But the point is, I think we're confusing two different things. One is competition of banks or banknotes or whatever within a dollar framework. Okay, within the gold dollar framework, that's number one, or dollar framework. And the other thing which I think is unrealistic is dollars competing with timberlakes, Rothbards, etc., as currency units. That I think is unrealistic. I don't think anybody would take these units. That's the difference. If the question is about the efficacy of competing private monies, I'll try to repeat the questions as they're brought up here. I think something that critics of competitive money forget is that there are demanders as well as suppliers.

59:32If we were all able to issue our own currencies, the only way that we could make that effective is by getting other people to accept them. And the only way they would accept them is if they knew they were good. We cannot emphasize too much, I think, the intelligence of the consumer. There's a question back here. Yes? I was wondering if Professor Rothbard could explain the personal relationship between bailment law and fractional reserve banking. Oh, the gentleman wants to know if I could explain the historical relationship between bailment law and fractional reserve banking. I'll try to do it very quickly.

1:00:20I often wonder, before I started investigating the question, I wonder how come these early bankers weren't in jail, because essentially what they were doing in a fractional reserve system is they promised to pay on demand, pay in gold or silver on demand, The issue is essentially fake warehouse receipts and non-existent gold and silver and lend that out. And this is not only dangerous, it's also really embezzlement, which seems to be in any correct legal system. You're taking somebody else's money and lending it out and getting interest on it. And while the person will get who, the positor still thinks he has the money, they are ready for him to pick up at any moment. in any moment, as it would be in a warehouse. If you left your jewels in a warehouse and the warehouse owner takes the jewels and lends them out for six months or something like that, it would not be considered strictly kosher. It would be considered illegal.

1:01:13So apparently what happened was the bailment law, bailment is a legal contract of warehouse, of guarding something for somebody, keeping something safe keeping for somebody else. Bailman Law is apparently a very underdeveloped state for a long time, so it's no wonder that it wasn't applied to banks, it wasn't applied much to anything, so that even real warehouses were in a shaky legal situation until the 1920s and 30s, as a matter of fact, in Chicago, up until the 1960s, grain elevators, which were wheat warehouses, simply printed fake warehouse receipts to weed and speculated on the wheat market in them, which is obviously illegal since it's taking, it's printing They take a million bushels of wheat, a warehouse received for that when there wasn't any in there to begin with.

1:02:01So finally the law was changed, a crackdown on it. It was a loophole in bailment law to say, well, you can't do that. You're supposed to be a warehouse. You're supposed to be there at any moment to redeem. And so it's only, as I say, in recent years that even warehouses have been cracked down on to fulfill the warehouse function. In recent years even warehouses have been cracked down on to fulfill the warehouse function and not the embezzlement function. So it's no wonder the banks were able to do that. And the case of banking was just the opposite. The banks in England, in the early 19th century, the courts in England, the chief justices of the side, it was not a bailment, it was really a debt, in which case the banks owned the money to the depositors or the note holders.

1:02:46Although the banks, the courts have always been waffling on this because they keep saying, well, it's true, it's only a debt. On the other hand, there's a special trust that the bank has, therefore, and a positive thinks he can get his money at any time. So they keep waffling. The court decisions keep waffling all the time on this. I think we're going to have to move on in the interest of time, the scarce resource. And if you have other questions, we can perhaps tackle them later.