WEBVTT NOTE The Gold Standard Before the Civil War 1 00:00:00.000 --> 00:00:05.600 My general theme today is the gold standard in American history and banking in American history. 2 00:00:05.600 --> 00:00:10.200 There's several myths which have been propounded by most economic historians, if not all, 3 00:00:10.200 --> 00:00:15.400 I wouldn't say all the most, until recent years. 4 00:00:15.400 --> 00:00:21.100 And the two most important myths that I want to focus on is the first one, 5 00:00:21.100 --> 00:00:27.700 which you've all probably heard if you've read about colonial monetary history, 6 00:00:27.700 --> 00:00:34.940 is that the colonial America suffer from a great shortage of species, shortage of gold and silver. 7 00:00:34.940 --> 00:00:44.660 And therefore, because of this shortage, colonial governments had to print lots of paper money to make up for this, for this thief deficiency. 8 00:00:44.660 --> 00:00:51.380 That's one myth, which I think we will examine. 9 00:00:51.380 --> 00:00:57.620 The second myth, which has a whole bunch of subheads, which will take me more than enough time, 10 00:00:57.620 --> 00:01:01.820 is the myth of the central banks in the United States. 11 00:01:01.820 --> 00:01:09.380 The role of the central banks has always been to restrain the evil expansionary impulses 12 00:01:09.380 --> 00:01:11.900 and tendencies of private banks. 13 00:01:11.900 --> 00:01:15.820 And the private banks or free banks, if they're allowed there ahead, 14 00:01:15.820 --> 00:01:21.420 tend to inflate too much, and therefore you need the central bank as a wise 15 00:01:21.420 --> 00:01:25.780 patron on high or god out of the machine 16 00:01:25.780 --> 00:01:32.380 to fix things up, to control them and to moderate them, restrain their expansionary tendencies. 17 00:01:32.380 --> 00:01:38.580 And a sub-variant of that, of course, is this is true. 18 00:01:38.580 --> 00:01:42.180 That means that the private banks or the state banks, as they were called in American history, 19 00:01:42.180 --> 00:01:46.580 because most of the banks were chartered by the states, 20 00:01:46.580 --> 00:01:48.880 that the state banks must have been chafing at the bit. 21 00:01:48.880 --> 00:01:53.880 They must have hated the central bank and wished for its extermination. 22 00:01:53.880 --> 00:01:58.760 The brunt of my talk is that the exact opposite has been true in all these cases. 23 00:01:58.760 --> 00:02:03.000 In the case of the central bank, the state banks were all for it 24 00:02:03.000 --> 00:02:08.160 and fought hard for its continuation or establishment. 25 00:02:08.160 --> 00:02:10.680 OK. 26 00:02:10.680 --> 00:02:15.920 Myth number one about colonial America. 27 00:02:15.920 --> 00:02:21.200 We start off with, it should seem peculiar to an economist. 28 00:02:21.200 --> 00:02:24.760 It's characteristic that most historians don't know anything about economics, 29 00:02:24.760 --> 00:02:28.440 most economists don't know anything about history. 30 00:02:28.440 --> 00:02:32.840 For an economist, it sounds very peculiar, it should be a red flag of the bull, 31 00:02:32.840 --> 00:02:35.720 to start talking about a shortage of specie, 32 00:02:35.720 --> 00:02:40.200 and that colonial America suffered from a terrible money shortage. 33 00:02:40.200 --> 00:02:41.800 Why couldn't we buy specie? 34 00:02:41.800 --> 00:02:44.080 I mean, there was, after all, transportation going back and forth, 35 00:02:44.080 --> 00:02:47.520 there was plenty of trade back and forth to Europe, 36 00:02:47.520 --> 00:02:50.920 there were plenty of coins, silver and gold coins around, 37 00:02:50.920 --> 00:02:55.920 Why couldn't we simply buy them, transport species to America and use it? 38 00:02:55.920 --> 00:03:00.920 That's the first thing we should, you know, set off a light in one's noodle. 39 00:03:00.920 --> 00:03:07.920 It's true that the British government, suffering from mercantilist fallacies, as most American governments did too, 40 00:03:07.920 --> 00:03:11.920 you know, actually part and parcel of the same British Empire, 41 00:03:11.920 --> 00:03:16.920 passed a law that the Americans' colonies couldn't have mints, 42 00:03:16.920 --> 00:03:20.920 and also try to keep British species in Britain. 43 00:03:20.920 --> 00:03:22.920 However, we didn't need British species. 44 00:03:22.920 --> 00:03:28.920 As a matter of fact, most of the coins that we used were Spanish silver dollars, 45 00:03:28.920 --> 00:03:32.920 which we can import from Spain. 46 00:03:32.920 --> 00:03:40.920 And we also used later on Austrian Maria Theresa sovereigns, units, etc. 47 00:03:40.920 --> 00:03:43.920 So we didn't really need English coin. 48 00:03:43.920 --> 00:03:49.920 and we used Spanish and other foreign coins, Portuguese coins, Austrian coins, etc., etc. 49 00:03:49.920 --> 00:03:54.920 So the first problem then is if there was a so-called shortage of species, why didn't we buy any? 50 00:03:54.920 --> 00:03:58.920 Why didn't Americans simply buy this stuff from abroad? 51 00:03:58.920 --> 00:04:02.920 So it turns out, because whenever an economist hears the word shortage, 52 00:04:02.920 --> 00:04:05.920 he or she should immediately start saying, well, what do you mean shortage? 53 00:04:05.920 --> 00:04:07.920 There is no shortage in the free market. 54 00:04:07.920 --> 00:04:10.920 There's plenty of scarcity in the free market, as we all know. 55 00:04:10.920 --> 00:04:13.920 There's no shortage. There's no situation you can't find something. 56 00:04:13.920 --> 00:04:16.920 For example, Rembrandts are very scarce, quite obviously. 57 00:04:16.920 --> 00:04:18.920 On the other hand, there's no Rembrandt shortage. 58 00:04:18.920 --> 00:04:21.920 I haven't heard anybody belly-yanking about a Rembrandt shortage. 59 00:04:21.920 --> 00:04:25.920 If you want to pay a million and a half dollars, you can find a Rembrandt to buy. 60 00:04:25.920 --> 00:04:33.920 So the question then is, what's interfering with this mechanism that doesn't permit shortage? 61 00:04:33.920 --> 00:04:40.920 and permit shortage. As a matter of fact, a shortage is only the result of government intervention of a maximum price control. 62 00:04:40.920 --> 00:04:47.920 If, for example, a government suddenly decreed for some obscure reason, of course, you people in the heart of government, 63 00:04:47.920 --> 00:04:55.920 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, 64 00:04:55.920 --> 00:04:59.920 should only sell for 10 cents a loaf in order to help the American masses eat their Wonder Bread. 65 00:04:59.920 --> 00:05:04.400 Wondered Bread, right, because every kid deserves at least a loaf a day. 66 00:05:04.400 --> 00:05:08.320 So if the government then decreed this and said, okay, from now on, as a maximum price 67 00:05:08.320 --> 00:05:14.000 control of 10 cents on every loaf of Wondered Bread, there would be an instantaneous shortage. 68 00:05:14.000 --> 00:05:18.160 In other words, people would rush out and buy Wondered Bread for a dime a loaf. 69 00:05:18.160 --> 00:05:22.640 They'd shift from Silver Cup and Tasty Bread and Pepperidge Farms and all the other goodies, 70 00:05:22.640 --> 00:05:24.360 because it's not only a dime. 71 00:05:24.360 --> 00:05:28.280 In the meantime, the Wondered Bread manufacturers would stop producing Wondered Bread for a 72 00:05:28.280 --> 00:05:29.280 dime a loaf. 73 00:05:29.280 --> 00:05:35.880 So we'd have very quickly a Wonderbread shortage, couldn't find it on a shelf, a black market 74 00:05:35.880 --> 00:05:40.840 would then develop with people of mysterious folks with raincoats on shady street corners 75 00:05:40.840 --> 00:05:44.780 offering hot Wonderbread for five dollars a loaf. 76 00:05:44.780 --> 00:05:50.800 So the whole phenomenon of a shortage, a shortage only exists, I think it's safe to say, I figure 77 00:05:50.800 --> 00:05:55.100 to say that a shortage only exists in the world when there's a government maximum price 78 00:05:55.100 --> 00:05:58.400 control below the free market level. 79 00:05:58.400 --> 00:06:07.320 So therefore, the constant complaining about a shortage of species in colonial America 80 00:06:07.320 --> 00:06:12.080 should let one lead one on to think, well, there must be some government involved somewhere, 81 00:06:12.080 --> 00:06:14.800 and indeed there was. 82 00:06:14.800 --> 00:06:23.120 Specifically, we have Gresham's Law, which is sort of a charming, which is, unfortunately, 83 00:06:23.120 --> 00:06:28.040 this is sort of a side point, but I think it's an interesting one. 84 00:06:28.040 --> 00:06:32.740 Gresham's Law is almost always stated incorrectly. 85 00:06:32.740 --> 00:06:39.480 It's stated, the first person I can think, I've been able to find, I did some studying of this, 86 00:06:39.480 --> 00:06:44.120 who enunciated Gresham's Law, was not Gresham, of course, I mean, it was way before Gresham. 87 00:06:44.120 --> 00:06:47.640 It was Aristophanes, the great Greek satiric playwright. 88 00:06:47.640 --> 00:06:49.760 His marvelous play, The Frogs. 89 00:06:49.760 --> 00:06:52.800 And in The Frogs, he marked it. 90 00:06:52.800 --> 00:06:56.480 In other words, the implications of something peculiar about money 91 00:06:56.480 --> 00:07:04.480 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, 92 00:07:04.480 --> 00:07:10.480 then somehow gold will disappear and paper will out-compete it, or bad money will out-compete it. 93 00:07:10.480 --> 00:07:14.480 And this is very peculiar because usually on the free market it's just the opposite. 94 00:07:14.480 --> 00:07:17.480 Usually good products will out-compete bad products. 95 00:07:17.480 --> 00:07:20.480 If you have a radio that doesn't work competing with radios that do work, 96 00:07:20.480 --> 00:07:27.120 The non-working radio is going to disappear pretty quickly, even without a OSHA or whatever, or the government bureau. 97 00:07:27.120 --> 00:07:34.960 So, but unfortunately, Aristophanes stated it incorrectly. He said, he had a little poem about it. 98 00:07:34.960 --> 00:07:38.160 He said, first of all, he said, in our republic, bad citizens are preferred to good, 99 00:07:38.160 --> 00:07:41.600 just as bad money circulates while good money disappears. 100 00:07:41.600 --> 00:07:46.240 From Aristophanes, it's interesting, you can say that now even. 101 00:07:46.240 --> 00:07:47.880 Then he had a little poem where he said, 102 00:07:47.880 --> 00:07:51.320 For your old and standard pieces, valued and approved and tried, 103 00:07:51.320 --> 00:07:54.280 here among the Grecian nations and in all the world beside, 104 00:07:54.280 --> 00:07:57.760 recognized in every realm for trusty stamp and pure essay, 105 00:07:57.760 --> 00:08:00.760 are rejected and abandoned for the trash of yesterday, 106 00:08:00.760 --> 00:08:04.760 for a vile, adulterate issue, grossing counterfeit and base. 107 00:08:04.760 --> 00:08:08.000 Okay, so the first, as far as I can find out, 108 00:08:08.000 --> 00:08:11.720 first proper statement of Gresham's law, which stated it correctly, 109 00:08:11.720 --> 00:08:15.640 was by the great 14th century French physicist, astronomer, 110 00:08:15.640 --> 00:08:20.080 and an mathematician, Nicolo Rem, who stated it correctly. 111 00:08:20.080 --> 00:08:23.600 He then went on to become bishop of Lisieux. 112 00:08:23.600 --> 00:08:26.720 And essentially he's saying that if the, well, he said quote, 113 00:08:26.720 --> 00:08:30.760 if the fixed legal ratio of the coins differs from the market value of the metals, 114 00:08:30.760 --> 00:08:33.920 the coin which is underrated entirely disappears from circulation 115 00:08:33.920 --> 00:08:36.280 and the coin which is overrated alone remains current. 116 00:08:36.280 --> 00:08:37.760 Beautiful statement. 117 00:08:37.760 --> 00:08:39.680 Essentially in other words, if the government puts, 118 00:08:39.680 --> 00:08:42.000 if there are two monies circulating, 119 00:08:42.000 --> 00:08:45.600 if the government puts a maximum price control on a good money, 120 00:08:45.600 --> 00:08:53.100 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 121 00:08:53.100 --> 00:08:57.100 and hold on to the good one, either hoarding it or exporting it abroad. 122 00:08:57.100 --> 00:09:09.400 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, 123 00:09:09.400 --> 00:09:13.920 was asked by the King of Poland to offer, to offer proposals for currency reform. 124 00:09:13.920 --> 00:09:16.520 Everything was messed up on the currency. 125 00:09:16.520 --> 00:09:19.720 So in the early 16th century, he set forth an essay on money, 126 00:09:19.720 --> 00:09:22.160 which he used the correct version of Gresham's law, 127 00:09:22.160 --> 00:09:28.480 saying if the government overvalues one coin or one money, 128 00:09:28.480 --> 00:09:32.920 undervalues the other, undervalue one will be hoarded, melted down, or exported. 129 00:09:32.920 --> 00:09:36.360 And the quote, the degraded coin alone remains in circulation. 130 00:09:36.360 --> 00:09:42.560 Okay, so he had the whole thing. Gresham himself apparently did denunciate Gresham's law, indeed, 131 00:09:42.560 --> 00:09:46.360 but he was not the one who made the famous memorandum on it, which was really Sir Thomas Smith, 132 00:09:46.360 --> 00:09:51.360 who was a big, big shot tutor official and bureaucrat and financier. 133 00:09:51.360 --> 00:09:57.260 At any rate, so the true version, the correct version of Gresham's law is simply an application, 134 00:09:57.260 --> 00:10:04.560 as Mises pointed out many times, an application of the theory of price control causing shortages to money, 135 00:10:04.560 --> 00:10:08.200 The two monies operating side by side. 136 00:10:08.200 --> 00:10:12.720 Well, what happened in colonial America is precisely the working out of this, 137 00:10:12.720 --> 00:10:15.360 of this, of the Russians' law and action. 138 00:10:15.360 --> 00:10:22.600 The, for one thing, the, what the colonial governments did 139 00:10:22.600 --> 00:10:28.120 started to undervalue, undervalue species 140 00:10:28.120 --> 00:10:31.520 and overvalue their own crummy pound notes that the Massachusetts 141 00:10:31.520 --> 00:10:34.280 and other governments were putting out. 142 00:10:34.280 --> 00:10:45.280 In other words, they engage in continuing debasement of their own currency units and artificially overvaluing, excuse me, undervaluing a specie. 143 00:10:45.280 --> 00:10:56.980 So the result was a specie disappearing and too much Massachusetts paper and not enough specie in circulation. 144 00:10:56.980 --> 00:11:00.280 So the whole, I have a written paper which goes through all the statistics on this, 145 00:11:00.280 --> 00:11:05.680 I'm sure there's nothing more deadly in the world than hear statistics being read, so I'll spare you all that. 146 00:11:05.680 --> 00:11:14.280 At any rate, that's the, that's what happens. The definition of the shilling is also being manipulated, 147 00:11:14.280 --> 00:11:19.080 so the shilling will have more and more, less and less weight to it, less and less weight of silver, 148 00:11:19.080 --> 00:11:26.480 Massachusetts shilling and the Connecticut shilling, each one competitively debasing in order to try to subsize their exports 149 00:11:26.480 --> 00:11:31.480 and limit their imports and try to bring species into the country, into the colony. 150 00:11:31.480 --> 00:11:35.800 In either case, it really worked very well. 151 00:11:35.800 --> 00:11:42.680 While this was going on, the two important things happened on the history of money in the 1690s. 152 00:11:42.680 --> 00:11:46.360 It was a dramatic decade for the history of the world money. 153 00:11:46.360 --> 00:11:50.760 One thing that happened was that the governments discovered government paper. 154 00:11:50.760 --> 00:11:54.640 They hadn't used it before. As far as I can see, outside of China, 155 00:11:54.640 --> 00:11:58.440 which of course invented both paper and printing long before we did in the West 156 00:11:58.440 --> 00:12:02.340 and therefore went through a whole cycle about several centuries before the West did. 157 00:12:02.340 --> 00:12:06.940 But of course nobody knew what was going on in China, so it was a totally isolated kind of situation. 158 00:12:06.940 --> 00:12:14.340 Outside of China, there had been no government paper money issues before 1690, 1692. 159 00:12:14.340 --> 00:12:20.540 The, actually it was 1690, the, there had been bank paper, bank notes, paper bank notes 160 00:12:20.540 --> 00:12:24.340 and government coins which the government was progressively debasing 161 00:12:24.340 --> 00:12:26.220 by juggling standards of weight. 162 00:12:26.220 --> 00:12:28.460 But there haven't been any actual government issues of paper money. 163 00:12:28.460 --> 00:12:31.940 This, the invention of government paper then belongs to 164 00:12:31.940 --> 00:12:35.740 the credit or the blame of Massachusetts, the royal government of Massachusetts. 165 00:12:35.740 --> 00:12:40.820 What happened was that there was a custom in those days for Massachusetts troops 166 00:12:40.820 --> 00:12:44.860 to go out and raid, plunder the French in Quebec, 167 00:12:44.860 --> 00:12:47.060 and actually in Nova Scotia. 168 00:12:47.060 --> 00:12:50.460 The French were very productive fishermen. 169 00:12:50.460 --> 00:12:53.900 They didn't have too many people up there. They had a lot of fish and furs and so forth. 170 00:12:53.900 --> 00:12:59.220 Every three or four years, Massachusetts troops would go up there and plunder it. 171 00:12:59.220 --> 00:13:04.620 And they'd come back with a loot to Boston and auction it off and pay the soldiers out of the proceeds. 172 00:13:04.620 --> 00:13:08.980 Sort of a pirate expedition, the best way I can describe it. 173 00:13:08.980 --> 00:13:17.460 And this was one of the customs of Massachusetts, which we don't hear about, you know, by centennials. 174 00:13:17.460 --> 00:13:20.500 But anyway, and the French being outnumbered usually lost. 175 00:13:20.500 --> 00:13:23.860 Well, this time the French won, and this was before 1690. 176 00:13:23.860 --> 00:13:24.900 It was a plunder expedition. 177 00:13:24.900 --> 00:13:28.100 We'd go out there and steal the fish and the furs. 178 00:13:28.100 --> 00:13:29.820 And they had a good fort there, and they were ready for us. 179 00:13:29.820 --> 00:13:30.620 And anyway, they won. 180 00:13:30.620 --> 00:13:34.980 So the troops come back, not only with no booty, no loot, 181 00:13:34.980 --> 00:13:37.900 and also not getting paid. 182 00:13:37.900 --> 00:13:39.740 One of the great insights we have in history 183 00:13:39.740 --> 00:13:43.420 is that in the course of history, when soldiers don't get paid, 184 00:13:43.420 --> 00:13:46.740 they get very, very edgy. 185 00:13:46.740 --> 00:13:50.240 They have a lot of edgy people with guns. 186 00:13:50.240 --> 00:13:54.840 This makes the government very upset, very worried, and they don't like this. 187 00:13:54.840 --> 00:13:59.440 So the Massachusetts government is wildly looking around for some way to pay the soldiers. 188 00:13:59.440 --> 00:14:04.240 And they didn't have any credit, they didn't have any gold. 189 00:14:04.240 --> 00:14:08.640 As usual, they're in bad fiscal shape. That's true of almost any government. 190 00:14:08.640 --> 00:14:15.640 So they decide, why don't we just issue paper notes, call it pounds, and to pay them with that, hope this works. 191 00:14:15.640 --> 00:14:22.520 So, in December of 1690, Massachusetts issued the first government paper money in the Western world. 192 00:14:22.520 --> 00:14:26.480 Seven thousand pounds of paper and notes to pay the salaries of these soldiers. 193 00:14:26.480 --> 00:14:29.120 Now, they couldn't issue just, they couldn't just say paper. 194 00:14:29.120 --> 00:14:31.640 They couldn't just say pounds because they wouldn't be accepted. 195 00:14:31.640 --> 00:14:36.960 So, Massachusetts made a solemn two-fold pledge, you know, about pledges in politics. 196 00:14:36.960 --> 00:14:41.400 Two pledges, which they would ever swear, ever always to keep. 197 00:14:41.400 --> 00:14:44.000 One, that they redeem the notes and speach it in a few years. 198 00:14:44.000 --> 00:14:47.500 A few years is a little vague, but you know, a few years. 199 00:14:47.500 --> 00:14:50.300 And two, they would absolutely make no further issues with paper money. 200 00:14:50.300 --> 00:14:53.900 This was it, 7,000 pounds of men on a quip. 201 00:14:53.900 --> 00:14:57.300 Well, as usually happens in this situation, 202 00:14:57.300 --> 00:15:00.200 paper, the discovery of paper money is a wonderful thing for the government, 203 00:15:00.200 --> 00:15:02.100 because nothing much happens at first. 204 00:15:02.100 --> 00:15:04.300 I mean, the world doesn't come to an end, you wish you had paper, 205 00:15:04.300 --> 00:15:06.900 you pay off your debts, hey, this is great. 206 00:15:06.900 --> 00:15:10.300 Prices go up a little bit, but not really too much at first. 207 00:15:10.300 --> 00:15:13.800 So it seems to the government they have a magic, sort of magic open sesame here, 208 00:15:13.800 --> 00:15:21.800 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. 209 00:15:21.800 --> 00:15:29.800 So in a few years the idea of redemption faded away, I mean it was forgotten, the idea of species redemption. 210 00:15:29.800 --> 00:15:33.800 And the pledge limit itself evaporated only a few months, as a matter of fact as early as February, 211 00:15:33.800 --> 00:15:38.800 that means two months after the issue, they swore up and down 7,000 pounds and that's it forever. 212 00:15:38.800 --> 00:15:47.800 They said the 7,000 pound issue would fall on far short, as they put it, far short of their needs, right? 213 00:15:47.800 --> 00:15:50.800 So they proceeded to issue 40,000 pounds of new money. 214 00:15:50.800 --> 00:15:52.800 Oh, wow, this is fantastic. 215 00:15:52.800 --> 00:15:57.800 Rev it up, kid, in order to repay all the colony's debts past, present, and whatever. 216 00:15:57.800 --> 00:16:00.800 And then again say, this is the last, this is it. 217 00:16:00.800 --> 00:16:02.800 From now on, this is the final issue. 218 00:16:02.800 --> 00:16:05.800 Of course, they kept issuing forever, for many years. 219 00:16:05.800 --> 00:16:12.280 and only one year the paper money depreciated by 40 percent and at that 220 00:16:12.280 --> 00:16:15.560 point two pamphlets were written I don't know the names I think anonymous 221 00:16:15.560 --> 00:16:18.480 pamphlets attacking the public this is interesting attacking the public for 222 00:16:18.480 --> 00:16:23.600 being delinquent and satish as they call it for for for buying these notes and 223 00:16:23.600 --> 00:16:26.800 only accepting these notes only 40 percent at 40 percent off they should be 224 00:16:26.800 --> 00:16:30.320 at par they said after all the government is a democratically elected 225 00:16:30.320 --> 00:16:34.000 government this government of their own choosing they must therefore their honor 226 00:16:34.000 --> 00:16:38.800 are bound to consider these paper money at par with specie. 227 00:16:38.800 --> 00:16:41.280 So, of course, these exhortations didn't work. 228 00:16:41.280 --> 00:16:43.800 At that point, a year later, after the exhortation didn't work, 229 00:16:43.800 --> 00:16:46.560 this always happens, by the way, when voluntary exhortations 230 00:16:46.560 --> 00:16:49.080 don't work, when the government officials say, 231 00:16:49.080 --> 00:16:53.000 OK, you and you stop spending to stop inflation, let's say. 232 00:16:53.000 --> 00:16:54.920 And that obviously doesn't work. 233 00:16:54.920 --> 00:16:57.640 Then they say, OK, from now on, we take off the gloves. 234 00:16:57.640 --> 00:17:00.320 You know, the old joke about Hitler, OK, from now on, 235 00:17:00.320 --> 00:17:02.480 no more Mr. Nice Guy. 236 00:17:02.480 --> 00:17:10.480 So, a year later, they're giving them a chance to voluntarily accept the depreciated notes at par. 237 00:17:10.480 --> 00:17:14.480 The Massachusetts government made the paper money compulsory legal tender for all debts at par. 238 00:17:14.480 --> 00:17:18.480 And then, of course, specie starts disappearing like mad. 239 00:17:18.480 --> 00:17:27.480 And they kept issuing more paper, and the paper kept depreciating, and the silver kept disappearing. 240 00:17:27.480 --> 00:17:35.480 Okay, 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. 241 00:17:35.480 --> 00:17:39.480 The result was still depreciation, rapid inflation, disappearance of specie. 242 00:17:39.480 --> 00:17:48.480 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, 243 00:17:48.480 --> 00:17:53.480 here we have 40% depreciated notes, you must accept this as part of specie. 244 00:17:53.480 --> 00:18:11.480 When parliament finally prohibited all paper money issues in the 1750s, the shortage was eliminated. 245 00:18:11.480 --> 00:18:16.480 The shortage suddenly disappeared, as often happens. 246 00:18:16.480 --> 00:18:21.480 That's the shortage of specie bit. 247 00:18:21.480 --> 00:18:30.980 The next major point is about central banking and their relationship with the private banks or state banks. 248 00:18:30.980 --> 00:18:40.980 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, 249 00:18:40.980 --> 00:18:44.480 and therefore the private banks were really against the central bank and tried to eliminate it. 250 00:18:44.480 --> 00:18:50.480 My contention is the result, just as the true facts, so to speak, just as in the case of the shortage, 251 00:18:50.480 --> 00:18:52.480 were just the opposite. 252 00:18:52.480 --> 00:18:56.480 True facts were that the central bank was put in by the banks 253 00:18:56.480 --> 00:19:00.480 in order to inflate the money supply and enable them all to inflate. 254 00:19:00.480 --> 00:19:04.480 In other words, the central bank acts as a cartelization device 255 00:19:04.480 --> 00:19:09.480 just as the Farm Price Support Program, 256 00:19:09.480 --> 00:19:12.480 the Federal Farm Support Program since 1929 257 00:19:12.480 --> 00:19:16.480 has acted as a giant cartelization device for farm products 258 00:19:16.480 --> 00:19:20.480 so as to cut production and raise prices or try to cut production and raise prices. 259 00:19:20.480 --> 00:19:23.480 Similarly, the central bank acts as a bank cartel device 260 00:19:23.480 --> 00:19:30.480 to enable all the banks to inflate together so that the natural free banking checks on inflation would be eliminated. 261 00:19:30.480 --> 00:19:37.480 And therefore, the private banks more or less, usually either both defended the creation of the banks, 262 00:19:37.480 --> 00:19:44.480 the central bank, and fought against their abolition in contrast to the myth, the exact opposite of the usual historical myth. 263 00:19:44.480 --> 00:19:59.480 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. 264 00:19:59.480 --> 00:20:07.480 So this is, similarly, the banking, central bank situation is the exact opposite of the usual historical story. 265 00:20:07.480 --> 00:20:17.480 Okay, we start off with central banking. First of all, during the Revolutionary War, there was no bank. 266 00:20:17.480 --> 00:20:22.480 I mean, banks did not develop at that point, or they had disappeared. 267 00:20:22.480 --> 00:20:30.480 The first commercial bank in the New Republic was also the first central bank, the Bank of North America. 268 00:20:30.480 --> 00:20:34.960 This was a plan fulfilling the Nationalist program. 269 00:20:34.960 --> 00:20:38.720 There was, just to say very briefly about the American Revolution. 270 00:20:38.720 --> 00:20:42.240 The American Revolution, such that it consisted of two groups of people, 271 00:20:42.240 --> 00:20:47.240 two groups of ideologies, two ideological, very diametrically opposed groups. 272 00:20:47.240 --> 00:20:52.600 One group, which was a majority of the public, I think there's no question about that, 273 00:20:52.600 --> 00:20:57.280 which mostly in the rural areas, subsistence rural areas, 274 00:20:57.280 --> 00:20:59.880 believed in a very minimal government. 275 00:20:59.880 --> 00:21:03.880 They believed that the American Revolution was a libertarian revolution. 276 00:21:03.880 --> 00:21:09.880 The object was to throw off big government altogether, not just the British government, but any big government, 277 00:21:09.880 --> 00:21:16.880 and to eliminate almost all government authority, cut taxes down to an absolute minimum, 278 00:21:16.880 --> 00:21:24.880 cut the budget down to absolute minimum, have free trade, free markets, gold or silver standard, no paper. 279 00:21:24.880 --> 00:21:27.880 In other words, extreme laissez-faire or libertarian program. 280 00:21:27.880 --> 00:21:35.880 This was basically the so-called Anti-Federalist position, which was held by the majority of the public. 281 00:21:35.880 --> 00:21:42.880 On the other hand, you had a small but powerful group of people, the Nationalists, who call themselves the Federalists because it sounds better. 282 00:21:42.880 --> 00:21:46.880 The Nationalist program, which believed just the opposite. 283 00:21:46.880 --> 00:21:49.880 The Nationalists wanted to recreate the British Empire without Britain. 284 00:21:49.880 --> 00:21:56.880 In other words, recreate the entire structure of a big government and mercantilist policies, essentially back to the old mercantilist policies. 285 00:21:56.880 --> 00:22:07.040 policies, with high tariffs, big public works program, heavy public debt, and high taxes 286 00:22:07.040 --> 00:22:13.400 to pay for the public debt, and a pay off of public debt, and a central bank which would 287 00:22:13.400 --> 00:22:19.840 inflate the money supply in an orderly manner, of course, orderly means money by the government, 288 00:22:19.840 --> 00:22:25.040 and using the cheap money to subsidize favored business groups and favored projects. 289 00:22:25.040 --> 00:22:29.440 So basically, the Nationalists were essentially the embryonic development of what we have now. 290 00:22:29.440 --> 00:22:34.840 It's just sort of looking back and saying, okay, this is the beginning of the low-fair, warfare state. 291 00:22:34.840 --> 00:22:42.440 So they wanted a British Empire without Great Britain, and they wanted a very strong president, 292 00:22:42.440 --> 00:22:47.440 a very strong federal government, and a very strong president as the chief executive, as a quasi-monarch, 293 00:22:47.440 --> 00:22:52.840 if not a name, then a fact. So we have then the so-called Hamiltonian vision. 294 00:22:52.840 --> 00:23:01.840 It was really a vision of Robert Morris, the first central banker, and Hamilton was his disciple, and Morris was his mentor, 295 00:23:01.840 --> 00:23:07.840 versus the so-called Jeffersonian vision of the ultra-minimal government. 296 00:23:07.840 --> 00:23:13.840 Okay, Morris, during the Revolutionary War, for various reasons, became an economic and financial dictator, 297 00:23:13.840 --> 00:23:16.840 a czar of the whole system. 298 00:23:16.840 --> 00:23:19.840 Morris has been called the financier of the American Revolution. 299 00:23:19.840 --> 00:23:25.540 That's the name which has been attached to him. Actually, as usual, it's just the exact opposite was correct. 300 00:23:25.540 --> 00:23:31.840 The Merkel Revolution financed him. He stole millions. It's unbelievable. 301 00:23:31.840 --> 00:23:40.640 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. 302 00:23:40.640 --> 00:23:43.940 There was no independent audit. There was no GAO. There was no nothing. 303 00:23:43.940 --> 00:23:47.940 We still don't know how many millions he stole. Basically, what happened was he got, 304 00:23:47.940 --> 00:23:51.840 He was a very wealthy merchant in Philadelphia. 305 00:23:51.840 --> 00:23:56.940 He became the economic financial czar of the Continental Congress. 306 00:23:56.940 --> 00:24:03.340 He then parceled out all the contracts to all the war contracts, 307 00:24:03.340 --> 00:24:06.740 printing money or borrowing money, 308 00:24:06.740 --> 00:24:09.040 parceling out all the war contracts to his own, 309 00:24:09.040 --> 00:24:13.240 either his own firm or his own partners or his own associates. 310 00:24:13.240 --> 00:24:16.740 You have enormous things where Robert Morris buys stuff from France 311 00:24:16.740 --> 00:24:25.500 and Robert Morris' ships and the total interpenetration of the treasury, treasury funding, treasury bank accounts, so to speak, and his own bank account. 312 00:24:25.500 --> 00:24:39.100 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. 313 00:24:39.100 --> 00:24:46.620 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. 314 00:24:46.620 --> 00:24:50.820 And one of his visions was to have a central bank which he, of course, would run. 315 00:24:50.820 --> 00:24:54.420 And he, during the Revolutionary War, he created, he chartered, 316 00:24:54.420 --> 00:24:58.420 he had Congress charter the Bank of North America in Philadelphia, 317 00:24:58.420 --> 00:25:00.320 which is supposed to be the first central bank. 318 00:25:00.320 --> 00:25:03.120 It was also the first commercial bank, 319 00:25:03.120 --> 00:25:07.620 and one of the privileges which the bank got 320 00:25:07.620 --> 00:25:11.220 was no other commercial bank was allowed to exist for at least 20 years, except this bank. 321 00:25:11.220 --> 00:25:15.620 In other words, this was a monopoly bank, okay? 322 00:25:15.620 --> 00:25:29.620 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. 323 00:25:29.620 --> 00:25:34.620 And of course, all the federal debt would then be purchased by the bank of North America. 324 00:25:34.620 --> 00:25:48.620 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. 325 00:25:48.620 --> 00:25:56.620 So 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. 326 00:25:56.620 --> 00:26:06.620 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. 327 00:26:06.620 --> 00:26:15.620 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. 328 00:26:15.620 --> 00:26:20.620 So it's great if you can get away with it, I suppose. 329 00:26:20.620 --> 00:26:32.620 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. 330 00:26:32.620 --> 00:26:37.620 It became then a straight commercial bank. He divested all the government funding from it. 331 00:26:37.620 --> 00:26:41.620 By the way, I think justice is not always triumph in the world, as you all know. 332 00:26:41.620 --> 00:26:48.620 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. 333 00:26:48.620 --> 00:27:18.620 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, 334 00:27:18.620 --> 00:27:27.620 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, 335 00:27:27.620 --> 00:27:35.620 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. 336 00:27:35.620 --> 00:27:44.620 They deliberately speeded up any communications between Federalist leaders, and they withheld communications between Anti-Federalist leaders. 337 00:27:44.620 --> 00:27:54.620 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. 338 00:27:54.620 --> 00:28:01.620 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. 339 00:28:01.620 --> 00:28:08.620 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. 340 00:28:08.620 --> 00:28:12.620 So they used the Blitzkrieg approach and it was quite effective. 341 00:28:12.620 --> 00:28:22.620 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. 342 00:28:22.620 --> 00:28:38.620 When 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. 343 00:28:38.620 --> 00:28:42.620 They were bought out, literally and figuratively. 344 00:28:42.620 --> 00:28:46.620 At any rate, as soon as the nationalists get into power, they push the Constitution through. 345 00:28:46.620 --> 00:28:51.620 One of the first things they did is set up the Hamilton Central Bank, the first bank in the United States. 346 00:28:51.620 --> 00:28:58.620 One of the major reasons according to Hamilton was, quote, to overcome the alleged, quote, scarcity of species. 347 00:28:58.620 --> 00:29:03.620 We're back again, being used now to justify central bank. 348 00:29:03.620 --> 00:29:16.300 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. 349 00:29:16.300 --> 00:29:23.860 It was just the opposite. They were not very sound. They inflated quite a bit and they spurred state banks to come into action. 350 00:29:23.860 --> 00:29:31.740 After the first bank came in, the result was a lot more state banks, a lot more inflated bank credit. 351 00:29:31.740 --> 00:29:37.540 When the Jeffersonians got in, this is the old story, of course, by the way, you all know too well, 352 00:29:37.540 --> 00:29:41.340 the Jeffersonian movement was supposed to be dedicated to smashing this whole apparatus, 353 00:29:41.340 --> 00:29:48.540 smashing the Monopoly Supreme Court, the central bank, the tariff and all the rest of it. 354 00:29:48.540 --> 00:29:54.140 As soon as they got in, as soon as Jefferson gets in the power, he becomes a, quote, a statesman, unquote. 355 00:29:54.140 --> 00:30:00.140 In other words, he sells out. It becomes what they now call pragmatic. 356 00:30:00.140 --> 00:30:07.900 And so what happens is the Democrat or Democrat-Republicans, half of them become pragmatists and they become very close to the moderate Federalists, 357 00:30:07.900 --> 00:30:10.780 that means those who didn't want an absolute monarchy. 358 00:30:10.780 --> 00:30:23.060 And 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, 359 00:30:23.060 --> 00:30:28.700 essentially continuing and accelerating the whole bank credit inflation with the First Bank. 360 00:30:28.700 --> 00:30:37.500 The First Bank Charter was up in 1911. It was a big fight, whether it should be repealed or not. 361 00:30:37.500 --> 00:30:44.300 Madison, who was the epitome of the centrist moderate, of the pragmatic moderate, opportunist moderate, 362 00:30:44.300 --> 00:30:48.100 was the one in favor of it and tried desperately to renew the bank. 363 00:30:48.100 --> 00:30:53.000 But enough people, enough disgruntled Federalists, plus old-fashioned, what they call old Republicans, 364 00:30:53.000 --> 00:31:00.000 and these hardcore Jeffersonian types, swung enough votes to defeat it by one vote in the House and in the Senate. 365 00:31:00.000 --> 00:31:08.000 So, at that point, we could say, well, we finally did not have a central bank, after the first time in American history. 366 00:31:08.000 --> 00:31:15.000 Didn't we have free banking then? No, we didn't, because what happened then was that we got into the War of 1812, 367 00:31:15.000 --> 00:31:21.000 and the War of 1812 was extremely unpopular in New England, or the War with England. 368 00:31:21.000 --> 00:31:26.000 New England had most of the manufactured goods, most of the armament equipment, and most of the banks. 369 00:31:26.000 --> 00:31:31.000 So how was the government, how was the Madison administration going to finance the war effort? 370 00:31:31.000 --> 00:31:38.000 The way they financed it was by encouraging a whole bunch of new banks, which suddenly popped up in Pennsylvania, Kentucky and other states. 371 00:31:38.000 --> 00:31:48.000 Essentially money factories with almost no specie capitalists, printing paper dollars and using it to buy U.S. government bonds. 372 00:31:48.000 --> 00:32:03.000 So, 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. 373 00:32:03.000 --> 00:32:16.000 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. 374 00:32:16.000 --> 00:32:27.000 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. 375 00:32:27.000 --> 00:32:31.000 New England banks did not inflate. New England didn't want to pay for the war effort anyway. 376 00:32:31.000 --> 00:32:37.000 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? 377 00:32:37.000 --> 00:32:43.000 At that point, we had a big watershed situation in the summer of 1814. 378 00:32:43.000 --> 00:32:46.200 The banks were essentially bankrupt, means all the banks outside of New England. 379 00:32:46.200 --> 00:32:48.200 The federal government and state governments then said, 380 00:32:48.200 --> 00:32:52.000 okay, we will now permit the banks to suspend specie payments. 381 00:32:52.000 --> 00:32:56.300 That means to continue an operation, continue lending money, printing money, lending it out, 382 00:32:56.300 --> 00:32:59.100 and forcing their debtors to pay them back. 383 00:32:59.100 --> 00:33:02.800 But they didn't have to pay their depositors or their note holders. 384 00:33:02.800 --> 00:33:06.300 They were relieved from responsibility, a contractual responsibility, 385 00:33:06.300 --> 00:33:09.300 of paying their paper money in specie. 386 00:33:09.300 --> 00:33:13.300 So, of course, they love that. More banks than pop in that action. 387 00:33:13.300 --> 00:33:17.300 And this continues, this situation of fiat individual paper. 388 00:33:17.300 --> 00:33:21.300 I mean, it's just like I could print dollars and lend them out. 389 00:33:21.300 --> 00:33:25.300 It's actually something like that. This situation continued for two and a half years, 390 00:33:25.300 --> 00:33:29.300 long after the war. After the war was over, 391 00:33:29.300 --> 00:33:33.300 the mass administration, now the Monroe administration, 392 00:33:33.300 --> 00:33:37.300 was confronted with a choice. They had to do something. They couldn't have a permanent system 393 00:33:37.300 --> 00:33:41.780 system of a hundred banks in the country each issuing dollars not having to pay 394 00:33:41.780 --> 00:33:46.180 for it. It's obviously not going to work for any length of time. So what could be 395 00:33:46.180 --> 00:33:51.420 done? Well there are two courses were offered, two policies were 396 00:33:51.420 --> 00:33:56.140 offered. One was the the old-fashioned Jeffersonian policy, so-called Old 397 00:33:56.140 --> 00:33:58.420 Republic, in which some of the Federalists now went along with in order 398 00:33:58.420 --> 00:34:03.340 to make trouble, which was a policy of forcing the banks to redeem or else go 399 00:34:03.340 --> 00:34:08.340 go out of business, force the banks to redeem and gold and silver or else get out. 400 00:34:08.340 --> 00:34:15.340 This however was not the sort of thing that moderates quote unquote of any staff enjoy. 401 00:34:15.340 --> 00:34:20.340 And so the Monroe administration made a deal with the banks to create a central bank, 402 00:34:20.340 --> 00:34:25.340 new central bank, new second bank in the United States, which would then validate, 403 00:34:25.340 --> 00:34:30.340 which first of all would validate all the inflated paper which had been going on for the last four years, three years, 404 00:34:30.340 --> 00:34:37.340 and also continue inflating the money supply, which they did. 405 00:34:37.340 --> 00:34:45.340 So the second bank was put through and it was then used, then it started inflating like mad. 406 00:34:45.340 --> 00:34:52.340 It printed six million dollars in these areas where the banks were shaky and it started printing like mad, inflating like mad, 407 00:34:52.340 --> 00:34:59.340 thereby creating a big boom in the first big depression in the United States history in 1819. 408 00:34:59.340 --> 00:35:06.140 Once again, the state, I should underline one thing here, the state banks were all for it. 409 00:35:06.140 --> 00:35:10.860 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. 410 00:35:10.860 --> 00:35:18.300 They were also all in favor of creating a second bank, because otherwise it would have had to go under. 411 00:35:18.300 --> 00:35:26.340 Also a couple of words that should be mentioned here as instrumental in this whole operation. 412 00:35:26.340 --> 00:35:56.340 The 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, 413 00:35:56.340 --> 00:36:07.340 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. 414 00:36:07.340 --> 00:36:20.340 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. 415 00:36:20.340 --> 00:36:31.340 The 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. 416 00:36:31.340 --> 00:36:41.340 Dallas was a lawyer for the Girard interests. And Dallas puts through the Second Bank and retires, his job having been accomplished. 417 00:36:41.340 --> 00:36:46.540 Gerard also got, as president of the bank, William Jones, another Philadelphia cronium there. 418 00:36:46.540 --> 00:36:51.540 So they have the whole Philadelphia connection, which continues on, by the way, for another 30 years or so, 419 00:36:51.540 --> 00:36:54.540 and running the whole central banking operation. 420 00:36:54.540 --> 00:37:02.540 The, okay, the, another person I should also mention here, 421 00:37:02.540 --> 00:37:07.940 probably the top moderate, quote-unquote, moderate Jeffersonian Democrat, Republican in the country, 422 00:37:07.940 --> 00:37:11.940 by Senator Samuel Smith of Maryland, a very powerful figure. 423 00:37:11.940 --> 00:37:18.940 Smith, in the course of the inflation of the Bank of the United States when it first got started, 424 00:37:18.940 --> 00:37:23.940 there was also outright cookery going on, enormous number of outright thievery by the Baltimore 425 00:37:23.940 --> 00:37:30.940 and the Baltimore branch of the bank of the United States. 426 00:37:30.940 --> 00:37:37.940 I've siphoned off into the pockets of the guy named Buchanan and his clerk. 427 00:37:37.940 --> 00:37:41.940 Who was Buchanan? Buchanan was a partner of Smith and Company, Smith-Buchanan Company, 428 00:37:41.940 --> 00:37:47.940 the major mercantile firm in Baltimore which is owned by Samuel Smith, his senior partner. 429 00:37:47.940 --> 00:37:53.940 Now since his two, his senior partner and his clerk were the two biggest crooks in this operation, 430 00:37:53.940 --> 00:37:59.940 I figure if Buchanan and the other guy were crooks, could Samuel Smith have been far behind in this operation? 431 00:37:59.940 --> 00:38:29.940 The 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. 432 00:38:29.940 --> 00:38:33.940 which Van Buren and Polk then completed. 433 00:38:33.940 --> 00:38:37.540 It should be pointed out something we didn't know until fairly recently is that 434 00:38:37.540 --> 00:38:42.580 the state banks basically were favors of the Bank of the United States, wanted to continue and 435 00:38:42.580 --> 00:38:45.700 favored Biddle on the famous fight against Jackson. 436 00:38:45.700 --> 00:38:50.020 So why did Jackson do what he did? Because basically he was a libertarian, he was a hard money 437 00:38:50.020 --> 00:38:54.340 advocate and libertarian. He read, he and his associates had read all the classical economic 438 00:38:54.340 --> 00:38:59.140 literature, the pre-Mises literature so to speak, and were convinced by it. They also were stung by 439 00:38:59.140 --> 00:39:10.140 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. 440 00:39:10.140 --> 00:39:18.140 And so you have, for the first time, classical liberal and libertarian ideologues, so to speak, responsible for a mighty and titanic reform. 441 00:39:18.140 --> 00:39:25.140 The next step, as far as they were concerned, was to eliminate the state banks too, and have a 100% gold system. 442 00:39:25.140 --> 00:39:30.260 System. They didn't accomplish that largely because the slavery question split the Democratic 443 00:39:30.260 --> 00:39:38.900 Party in half by the late 40s, late 1840s. Okay, the next, I just have time to say just 444 00:39:38.900 --> 00:39:42.000 very briefly about the Federal Reserve System. I could go on for another couple of weeks 445 00:39:42.000 --> 00:39:47.580 on that, but the Federal Reserve System is a very similar story. In other words, the 446 00:39:47.580 --> 00:39:54.140 Federal Reserve System was put in by big banks. The bill was written. It took a few years 447 00:39:54.140 --> 00:40:24.140 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, 448 00:40:24.140 --> 00:40:30.140 The Federal Reserve, I think, very happily confirmed their judgment and has done this ever since. 449 00:40:54.140 --> 00:41:00.140 The Federal Reserve is responsible now, of course, for continuing and accelerating inflation, in between, responsible for big depressions. 450 00:41:00.140 --> 00:41:12.140 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. 451 00:41:12.140 --> 00:41:20.140 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. 452 00:41:20.140 --> 00:41:45.140 Thank you very much, Murray. It was a very stimulating paper. Having said that, I will now comment on it. 453 00:41:45.140 --> 00:42:04.140 My 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. 454 00:42:04.140 --> 00:42:11.140 He and I analyze things somewhat differently. We always come up with the same conclusion. 455 00:42:11.140 --> 00:42:21.140 That is the Federal Reserveum Delendum Est, just as the elder Cato said about Carthage. 456 00:42:24.140 --> 00:42:31.140 I think we ought to have a new law besides Gresham's law, which would say that in a competitive market, 457 00:42:31.140 --> 00:42:39.140 where money is supplied by the private enterprise system and free of government, 458 00:42:39.140 --> 00:42:47.060 that good money would drive out bad money because after all good shoes have driven out bad shoes 459 00:42:47.940 --> 00:42:55.700 and good food and good clothes have driven out less good and less good food and clothes 460 00:42:56.340 --> 00:43:03.620 and what we intuitively should expect from private enterprise is that it would also provide us with 461 00:43:03.620 --> 00:43:08.060 of the Good Money. 462 00:43:08.060 --> 00:43:15.460 We should note too that Gresham's Law only possible, as Murray emphasized, when government 463 00:43:15.460 --> 00:43:23.680 issues money, more particularly when the government imposes the coercion of legal tender. 464 00:43:23.680 --> 00:43:30.220 Because what legal tender says is that you must accept the money, whether you want to 465 00:43:30.220 --> 00:43:41.220 If you don't, you'll be a creditor who is deprived of the interest due that he would otherwise have received. 466 00:43:41.220 --> 00:43:51.220 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. 467 00:43:51.220 --> 00:44:16.220 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. 468 00:44:16.220 --> 00:44:39.220 However, 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. 469 00:44:39.220 --> 00:45:09.220 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 470 00:45:09.220 --> 00:45:21.420 where a resumption or redemption of paper money for gold or any other money for gold could be realized. 471 00:45:21.420 --> 00:45:36.220 Now into this came, into these monetary systems that were primarily gold standards, came governments with, as Murray suggested, central banks. 472 00:45:36.220 --> 00:45:45.220 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, 473 00:45:45.220 --> 00:46:00.220 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. 474 00:46:00.220 --> 00:46:08.220 They did come in as public banks, as banks for the fiscal operations of the government, 475 00:46:08.220 --> 00:46:12.220 and that set the stage for them to become central banks. 476 00:46:12.220 --> 00:46:19.220 But I don't think that they were perceived at the time as central banks. 477 00:46:19.220 --> 00:46:26.220 In fact, in many of the debates that involved the first and second banks of the United States, 478 00:46:26.220 --> 00:46:43.220 The central banking function, the manipulation of the monetary system in a deliberate fashion, was effectively proscribed. 479 00:46:43.220 --> 00:46:56.680 Well, then in the inflation of around the war of 1812, one thing that Murray has either 480 00:46:56.680 --> 00:47:05.820 sublimated or overlooked is the fact that the government was issuing paper money in 481 00:47:05.820 --> 00:47:17.580 the period between 1812 and 14, and causing this classic type of suspension of specie payments. 482 00:47:17.580 --> 00:47:21.820 That is, it was issuing what were then called treasury notes. 483 00:47:21.820 --> 00:47:29.580 They were euphemistically referred to as loans, but they had all the properties of money. 484 00:47:29.580 --> 00:47:33.900 They looked like currency. They were treated like currency. 485 00:47:33.900 --> 00:47:52.900 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. 486 00:47:52.900 --> 00:48:06.900 They were, however, in large denominations, $100 was the lowest for a while, and then $20, and then finally smaller denominations, 487 00:48:06.900 --> 00:48:18.900 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. 488 00:48:18.900 --> 00:48:27.900 So the government's provided, as it's doing today, too much monetary base material. 489 00:48:27.900 --> 00:48:34.900 And then the banking system used the base to inflate common money, 490 00:48:34.900 --> 00:48:40.900 and then got the criticisms of the government for having done so. 491 00:48:40.900 --> 00:48:44.900 Any scapegoat will do when the government is to blame. 492 00:48:44.900 --> 00:49:01.900 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. 493 00:49:01.900 --> 00:49:13.900 That was simply an administrative feature that was a result of the government's issues and not a cause of the inflation. 494 00:49:13.900 --> 00:49:43.900 in 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 495 00:49:43.900 --> 00:49:51.620 Pay for Money by taking it in through fiscal surpluses and burning it up. 496 00:49:51.620 --> 00:49:57.620 Fiscal surpluses are something that you've probably never heard of, certainly not if 497 00:49:57.620 --> 00:50:02.220 you're less than 50 years old. 498 00:50:02.220 --> 00:50:11.940 But surplus means that there's more coming in than going out. 499 00:50:11.940 --> 00:50:16.900 Well, that's all, those are all the comments I wish to make. 500 00:50:16.900 --> 00:50:24.220 I think maybe some of you might have some questions or comments, or Murray may want 501 00:50:24.220 --> 00:50:27.220 to respond to what I've said, yeah? 502 00:50:27.220 --> 00:50:55.520 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, 503 00:50:55.520 --> 00:51:02.520 The dollar has become the unit of currency. It started off, all these currencies started off as units of weight of gold or silver. 504 00:51:02.520 --> 00:51:05.520 The dollar used to be one-twentieth of a gold ounce way back. 505 00:51:05.520 --> 00:51:12.520 And so it starts off as a gold weight and then gets used as a currency name for hundreds and a couple hundred years. 506 00:51:12.520 --> 00:51:16.520 People are then used to it and they use it as a currency unit even when the gold is eliminated. 507 00:51:16.520 --> 00:51:20.520 Okay, that's the problem. So the money, the United States' money is the dollar. 508 00:51:20.520 --> 00:51:26.520 They love the dollar. They're crazy about it. Even in hyperinflation, they'd probably stick to it. 509 00:51:26.520 --> 00:51:31.520 So I don't think, I mean, if I were allowed to issue Rothbards or Dick Timberlake were allowed to issue Timberlakes, 510 00:51:31.520 --> 00:51:34.520 I'm in favor of being allowed to issue them. I don't think anybody would take them. 511 00:51:34.520 --> 00:51:38.520 You have to be pretty balmy to take them, right? So that's the problem. 512 00:51:38.520 --> 00:51:42.520 The problem is we're stuck with dollars. The dollar is our currency. We have to get the dollar back. 513 00:51:42.520 --> 00:51:45.520 I was in favor of denationalizing the dollar. That's the key. 514 00:51:45.520 --> 00:51:53.520 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. 515 00:51:53.520 --> 00:52:02.520 Then 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. 516 00:52:02.520 --> 00:52:12.520 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. 517 00:52:15.520 --> 00:52:24.560 Yes, I would essentially agree with that. Somewhere you have to start with some kind 518 00:52:24.560 --> 00:52:34.600 of definition. And under a pure commodity, money, you can let people decide whatever 519 00:52:34.600 --> 00:52:42.000 commodity they want to be money and then simply denominated by weight. That is, allow them 520 00:52:42.000 --> 00:53:03.000 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. 521 00:53:03.000 --> 00:53:06.000 How would you comment on all of it? 522 00:53:06.000 --> 00:53:08.000 Do you have any questions? 523 00:53:08.000 --> 00:53:11.000 There is an American issue, an American cause. 524 00:53:11.000 --> 00:53:16.000 I know that there is an issue of virgins, 525 00:53:16.000 --> 00:53:20.000 that the government has banned the issue of parks. 526 00:53:20.000 --> 00:53:22.000 How do you do it? 527 00:53:33.000 --> 00:53:37.000 and all kinds of competing monies in. 528 00:53:37.000 --> 00:53:43.000 And I think we have to allow that we are not guilty of the synoptic delusion, 529 00:53:43.000 --> 00:53:51.000 that we can imagine every facet and ploy of private enterprise that would take place. 530 00:53:51.000 --> 00:53:59.000 I think myself that there would be a few dominant monies that would come into existence 531 00:53:59.000 --> 00:54:08.320 through enterprisers that would know what they were doing, and in the same way that 532 00:54:08.320 --> 00:54:16.320 enterprise produces other goods and services. It would be something like a competitive telephone 533 00:54:16.320 --> 00:54:24.320 system. And we should note that even the private monopolistic telephone system reduced real 534 00:54:24.320 --> 00:54:29.160 cost of services consistently over the decades. 535 00:54:29.160 --> 00:54:32.920 So even if we had a single private monopoly of money, 536 00:54:32.920 --> 00:54:35.280 we would perhaps see the same thing. 537 00:54:35.280 --> 00:54:38.680 But I don't want to be guilty of the synoptic delusion myself. 538 00:54:38.680 --> 00:54:41.360 I don't know just how it would work. 539 00:54:41.360 --> 00:54:42.800 That's one of the beauties. 540 00:54:42.800 --> 00:54:44.520 If I can add to that a second now. 541 00:54:44.520 --> 00:54:47.680 Before 1913, that's exactly what we had in the United States. 542 00:54:47.680 --> 00:54:50.720 We had banks issuing paper notes as well as deposits. 543 00:54:50.720 --> 00:54:52.240 And this meant that, for example, if people 544 00:54:52.240 --> 00:55:22.240 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, 545 00:55:22.240 --> 00:55:29.240 and comparison to other notes and they pretty soon pass out of existence. 546 00:56:22.240 --> 00:56:25.240 and eventually the zeros. That was out, the paper money route 547 00:56:25.240 --> 00:56:28.000 essentially self-destructed after about three years. 548 00:56:28.000 --> 00:56:30.600 Then they were stuck, then they went to the public debt 549 00:56:30.600 --> 00:56:34.400 route and they started, you know, finance and issuing bonds which 550 00:56:34.400 --> 00:56:35.640 caused a great deal of trouble. 551 00:56:35.640 --> 00:56:37.640 Now it's true that this 552 00:56:37.640 --> 00:56:41.480 uh... how do you finance the war effort? Fortunately the good thing about 553 00:56:41.480 --> 00:56:45.960 the paper money was it left no legacy, it just disappeared and that was it. It became worthless. 554 00:56:45.960 --> 00:56:49.680 There was no legacy for the future, which the public debt did have. 555 00:56:49.680 --> 00:56:57.680 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, 556 00:56:57.680 --> 00:57:08.680 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, 557 00:57:08.680 --> 00:57:15.680 which is Washington's favorite, so Washington lost every battle until the end. 558 00:57:15.680 --> 00:57:22.680 Now, if we fought the war on guerrilla principles, you wouldn't need a lot of taxes or money because it's self-financing. 559 00:57:22.680 --> 00:57:26.180 The farmers pick up a rifle, they don't shoot the British, they go back on the farm. 560 00:57:26.180 --> 00:57:31.180 You don't need big taxes, a big sitting army in Valley Forge freezing to death. 561 00:57:31.180 --> 00:57:32.180 You don't need any of that stuff. 562 00:57:32.180 --> 00:57:36.180 You see, if we fought on those principles, one we would have won faster, 563 00:57:36.180 --> 00:57:42.180 until we wouldn't have had this legacy of big public debt and inflation and taxes at the end. 564 00:57:45.680 --> 00:57:50.900 I'd like to get back to the thing that I was trying to talk about. 565 00:57:52.300 --> 00:57:58.000 Well, actually, money is the medium of exchange, and it makes it much easier. 566 00:57:58.000 --> 00:58:03.680 The people don't have the power to lend themselves, and they have the power to make money. 567 00:58:03.680 --> 00:58:09.160 But if there's a scheme, and it's going to turn up, it's going to be hard. 568 00:58:09.160 --> 00:58:18.660 and a grade of 16% to all, and a time promise of 25 hours to not be as impoverished as it is today. 569 00:58:18.660 --> 00:58:26.160 Now, the method of meeting prices is just as bad as stuff that isn't in the same country, 570 00:58:26.160 --> 00:58:30.460 as stuff that isn't going in the same place, it's quite confusing. 571 00:58:30.460 --> 00:58:45.940 We can go to the supermarket and pay a $30 check on Chase Bank. 572 00:58:45.940 --> 00:58:49.260 It's a competition with Citibank, ChemBank and all the rest of it. 573 00:58:49.260 --> 00:58:50.820 There seems to be no problem. 574 00:58:50.820 --> 00:58:52.860 But the point is, I think we're confusing two different things. 575 00:58:52.860 --> 00:58:58.060 One is competition of banks or banknotes or whatever within a dollar framework. 576 00:58:58.060 --> 00:59:01.740 Okay, within the gold dollar framework, that's number one, or dollar framework. 577 00:59:01.740 --> 00:59:07.900 And the other thing which I think is unrealistic is dollars competing with timberlakes, Rothbards, etc., as currency units. 578 00:59:07.900 --> 00:59:12.100 That I think is unrealistic. I don't think anybody would take these units. That's the difference. 579 00:59:12.100 --> 00:59:24.500 If the question is about the efficacy of competing private monies, I'll try to repeat the questions as they're brought up here. 580 00:59:24.500 --> 00:59:32.700 I think something that critics of competitive money forget is that there are demanders as well as suppliers. 581 00:59:32.700 --> 00:59:43.900 If 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. 582 00:59:43.900 --> 00:59:47.860 And the only way they would accept them is if they knew they were good. 583 00:59:47.860 --> 00:59:58.220 We cannot emphasize too much, I think, the intelligence of the consumer. 584 00:59:58.220 --> 01:00:01.180 There's a question back here. 585 01:00:01.180 --> 01:00:02.260 Yes? 586 01:00:02.260 --> 01:00:11.620 I was wondering if Professor Rothbard could explain the personal relationship between bailment law and fractional reserve banking. 587 01:00:11.620 --> 01:00:17.620 Oh, the gentleman wants to know if I could explain the historical relationship between bailment law and fractional reserve banking. 588 01:00:17.620 --> 01:00:20.620 I'll try to do it very quickly. 589 01:00:20.620 --> 01:00:26.620 I often wonder, before I started investigating the question, I wonder how come these early bankers weren't in jail, 590 01:00:26.620 --> 01:00:34.620 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, 591 01:00:34.620 --> 01:00:40.620 The issue is essentially fake warehouse receipts and non-existent gold and silver and lend that out. 592 01:00:40.620 --> 01:00:49.620 And this is not only dangerous, it's also really embezzlement, which seems to be in any correct legal system. 593 01:00:49.620 --> 01:00:53.620 You're taking somebody else's money and lending it out and getting interest on it. 594 01:00:53.620 --> 01:00:59.620 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. 595 01:00:59.620 --> 01:01:13.620 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. 596 01:01:13.620 --> 01:01:24.620 So 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. 597 01:01:24.620 --> 01:01:54.620 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 598 01:01:54.620 --> 01:02:01.620 They take a million bushels of wheat, a warehouse received for that when there wasn't any in there to begin with. 599 01:02:01.620 --> 01:02:04.620 So finally the law was changed, a crackdown on it. 600 01:02:04.620 --> 01:02:07.620 It was a loophole in bailment law to say, well, you can't do that. 601 01:02:07.620 --> 01:02:08.620 You're supposed to be a warehouse. 602 01:02:08.620 --> 01:02:11.620 You're supposed to be there at any moment to redeem. 603 01:02:11.620 --> 01:02:18.620 And so it's only, as I say, in recent years that even warehouses have been cracked down on to fulfill the warehouse function. 604 01:02:18.620 --> 01:02:25.620 In recent years even warehouses have been cracked down on to fulfill the warehouse function and not the embezzlement function. 605 01:02:25.620 --> 01:02:28.620 So it's no wonder the banks were able to do that. 606 01:02:28.620 --> 01:02:33.620 And the case of banking was just the opposite. The banks in England, in the early 19th century, 607 01:02:33.620 --> 01:02:38.620 the courts in England, the chief justices of the side, it was not a bailment, it was really a debt, 608 01:02:38.620 --> 01:02:46.620 in which case the banks owned the money to the depositors or the note holders. 609 01:02:46.620 --> 01:02:52.020 Although the banks, the courts have always been waffling on this because they keep saying, well, it's true, it's only a debt. 610 01:02:52.020 --> 01:02:57.420 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. 611 01:02:57.420 --> 01:03:03.320 So they keep waffling. The court decisions keep waffling all the time on this. 612 01:03:03.320 --> 01:03:08.720 I think we're going to have to move on in the interest of time, the scarce resource. 613 01:03:08.720 --> 01:03:13.920 And if you have other questions, we can perhaps tackle them later.