Bondage Avoided
Winning the Revolutionary War gave Americans a chance to found a government on the principles of freedom for which so many had recently given their lives. Believing liberty was best protected in an association of strong states each run by the will of its citizens, they adopted the Articles of Confederation. Shay's rebellion convinced many that democracy without federal oversight would decay into anarchy.
Supporters of a strong central government became known as Federalists. They believed that the states would always act in their own interests, too often ignoring the greater interests of the nation. Alexander Hamilton, who wrote the Federalist Papers was one of their outspoken advocates. He said, "American liberty and happiness had much more to fear from the encroachments of the great states, than from those of the federal government."
Others saw a centralized government as an infringement on the rights of the states and, ultimately, on the rights of the individual. They consented to a federal government only because they were represented by an elected Congress. They wanted the power of the nation couched in the legislative branch, while the Federalists believed it should be placed in the executive branch. To many just liberated from a monarchs yoke, a strong executive looked like another king. They called the Federalist monocrates and thought they secretly wanted to create a monarchy influenced by a new breed of aristocrats created from the wealthy. Their fears were not unfounded.
Upon election, George Washington surrounded himself with Federalists. He chose Hamilton as his Secretary of the Treasury. The new republic faced sever financial difficulties. The nation owed more than five million dollars, most to its own citizens, and lacked the ability to pay. Not only did this punish Americans who needed cash to provide for their needs, but it restricted the government from borrowing to pay for expanding services and opportunities.
In his Report on Public Credit, presented to Congress in 1791, Hamilton proposed an elaborate solution. He suggested that the national debt be funded from federal revenues. The legislature would guarantee payment of all interest and a percentage of the principal due creditors from the monies it raised each year. This would restore public confidence, allowing for the sale of government notes and securities, and eventually retire the debt. In addition, he proposed chartering a national bank, which, after raising capital from its initial sale of stock, would handle the sale of securities and lend the government the monies it needed. By trading creditors, this technique would raise enough cash to pay note holders some, if not all, the monies owed them.
While Hamilton's solution seemed straight forward, it was mired in controversy. Many believed that Congress had no power to create corporations. That right belonged to the states. They argued that such absolute power would be welded by officials to line their pockets and insure their programs. Jefferson summed up their opinion when he said, "It would soon be used for no other purpose than to buy with sinecures useful partisans."
His suspicions were valid. For some time, speculators had being buying war bonds for a pittance from veterans desperate for cash. The Treasury Department had intentionally leaked the contents of Hamilton's report so that investors, anxious for profits, could comer war bonds at the expense of working Americans. Many of those speculators were foreigners. Dutch bankers alone had purchased three million pounds in notes, paying an average of only 25% of their face value. These speculators stood to make an immense fortune if the debt were funded.
Hamilton justified himself by saying that funding the debt put wealth in the hands of men best qualified to use it for constructive national purposes.
Hamilton's preference for industrialists, businessmen, speculators, and bankers angered Jefferson. As far as he was concerned, these people, most of whom were foreigners, were uninterested in America and intended to use it only for personal profit. Believing in America's agrarian way of life, he accused the heavy hand of organized business as always extracting money from the masses, especially farmers. Jefferson never doubted that Americans had created as nearly a perfect society as mankind had yet produced. As far as he was concerned, industrialization would corrupt the paradise the Revolution had established. He wanted factories and "the mobs of great cities," as he called them, confined to Europe so that their ‑accompanying ‑ slums did not overtake and spoil the tranquil farm land. Their presence would only increase greed, speculation, and the more carnal vices, 'by which," he added, "the liberties of a country are generally overturned."
The greatest danger of a central bank is its ability to print money. Every bank was a depository of gold or silver. They lent their money to borrowers as notes redeemable upon demand for part of the gold or silver they stored. People used their notes as money and traded them for goods and services. If a bank issued more notes than the worth of the gold and silver it housed, their notes declined in value. Inflation followed because the public would demand more of that bank's paper money to do business. Sometimes too many people would try to redeem their notes for gold or silver, driving an overextended bank into bankruptcy and leaving those holding its paper penniless.
The states authorized and, therefore, regulated the banks to insure sound banking practices. Hamilton wanted the central bank to regulate state banks. He also wanted it to mint a national currency. Since the government would only own 20% of the bank, most of its owners would be the wealthy elite, probably foreigners. Jefferson feared that these "tinsel aristocrats* would control the government manipulate the economy and enslave the citizens. He warned, "If the American people ever allow private banks to control the issue of their currency, first, by inflation and then by deflation, the banks and the corporations that will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered." He feared that without regulation a privately owned national bank charged with printing a national currency would eventually print more notes than could be redeemed, enriching its owners while making the country penniless.
The banking issue reached a stalemate in Congress. Hamilton asked Jefferson, who was Secretary of State, and James Madison, who was Speaker of the House, for help. They agreed on the condition that the nation's capital be moved to Philadelphia for ten years and then permanently located in Virginia. Like Washington, Jefferson and Madison were native Virginians. They also wanted its charter to last only twenty years and its ability to mint currency for the United States confined to gold and silver coins The measure passed the house 37‑20. Hamilton convinced President Washington to sign the bill. The Senate exercised greater influence over the President's decision by holding up passage of a bill authorizing the removal of the capital to the banks of the Potomac until Washington had signed.
The threat of an elite group of financiers controlling the money supply of the new republic and extracting its wealth was averted in those early days. Adam Weishaupt had already boasted his conspiracy would take over the states. If they wanted to achieve dominion by using the national America's economy, they failed. The national bank never became much more than a competitor of the state banks and its notes never achieved greater status as money than the notes of other sound fiduciaries. Its enforcement of banking regulations failed to drive state banks out of business, but, instead, so angered its stockholders that Congress refused to renew its charter. The banking industry was not monopolized by a consortium of wealthy aristocrats mostly from abroad. In 1802 Jefferson, then President, sold the remaining shares of the national bank owned by the government to the English banking house of Baring at a great profit. Nine years later, in 1811, it was dissolved.
Although Congress has periodically chartered other national banks, for today they continue to compete with state banks for customers, they never were authorized to print the nation's currency. This unhappy event, the creation of a private corporation to print notes for currency and control the banking system, did not happen until 1913, but that is another story.