I'm going to talk about how we got into this big mess of central banking in the first place,
at least in the U.S., and then, of course, a lot of other governments around the world,
including Canada, have had a penchant for well over a hundred years of imitating all
our bad ideas with regard to economic policy.
And so what I say is really, my title is the founding father of central banking, not only
just the U.S., but Canada as well, and Japan, and quite a few other places that have just
Imitated, you know, what we have done. And it's basically going to be a discussion of one of the chapters of a new book I have coming out in October, next month, called Hamilton's Curse, about Alexander Hamilton.
And this is the page boost right here. There's a picture of Hamilton and there's a little red or scarlet skull and crossbones in the middle of it on the cover there.
and there was a book written some years ago by a well-known historian named John Steele Gordon called Hamilton's Blessing and it was about the public debt, Alexander Hamilton who was the first U.S. Secretary of Treasury and he was a very influential person, he was quite a genius intellectually and he was a workaholic and Thomas Jefferson himself called Hamilton a political colossus
because we thought he was so brilliant and so hardworking and there's a book about Hamilton's foreign policy called the American Machiavelli and he was also a Machiavellian type of person so he was really a formidable person and he had everything to do with why it is we ended up with central banking in America and so I'm going to try to tell that story in a half hour or so by the way my book is available for advanced purchase on amazon.com
I can make a sales pitch on that. The subtitle is How Jefferson's Arch Enemy Betrayed the American Revolution and What It Means for Americans Today.
But Hamilton, at the beginning of the American Republic, he proposed a number of big government interventions.
He was an energetic statist of the worst kind, from my perspective. If you ever read much about him,
George Washington must have thought he was a big pain. He was always telling George Washington we need a government of more energy. He kept using the words more energy, more energy, and I think Washington at that point just wanted to retire to his farm on the Potomac River.
But anyway, one of his big proposals, he wrote a big report to Congress on the national debt.
And he proposed a large and perpetual debt for the sake of having a debt,
not to pay off the Revolutionary War necessarily, not to finance the building of roads or anything like that,
but just to have a big debt because he thought a large national debt would tie the affluent people of the country to the government.
They would be the bondholders and therefore they would go along with future proposals to raise taxes or to have a central bank that would print money because they wanted to make sure, they would want to make sure there's enough money in the treasury to pay off their bonds and so that was a very Machiavellian idea and he came right out and said that, that's why I want a big national debt. So it was all part of his scheme to have a government of more energy to have a large national debt for the sake of having a large national debt.
Debt, not necessarily to build anything, and of course the central bank was part and parcel
of that, because he understood a central bank of some kind, a bank run by politicians in
the nation's capital, would be able to monetize that debt, and this is not a brand new recognition
by me in this book, this has been recognized by people a long, long time ago, via the turn
One of the 20th century social scientists, William Graham Sumner, who taught at Yale
University for many years, wrote a biography of Hamilton, and he said this,
A national bank was not essential to the work of the federal government.
This was only a measure for carrying out the interweaving of the interests of wealthy men
with those of the government."
There's a book on this whole period of history called The Federalist Era.
Hamilton's political party was called the Federalist Party, and he was sort of the spengali
of the Federalist Party as far as I'm concerned.
He was not only brilliant, but he had the undying devotion of some really smart men like
John Marshall, who was the Chief Justice of the United States for 33 years, something
like the first three decades of the 19th century, and they just worshiped Hamilton as their
leader.
But anyway, John C. Miller, the author of this book on the Federalist era, says this,
The reports on public credit and the Bank of the United States laid the foundation for Hamilton's grand design,
the centralization of governmental authority, and the industrialization of the United States by means of government aid to business.
And one of the things I write about in this book is that, and why, in the subtitle of the book,
The American Revolution was partly a revolt against British mercantilism, the system of protectionism and government favors, government-franchised monopolies paid for through a central bank, the Bank of England in part, that helped solidify the power of the king, of the monarch.
and so they fought this revolution partly against the king of England who was
imposing this system on the colonists but there was always a group of men in
America in the United States who understood that if you're in the paying
end of an empire it's not a good thing but if you're on the money collecting
end of the empire that's not a bad gig if you're if you're in the collecting
side and so they always wanted to be in charge of an empire like just like the
and the British Empire. And so, of course, we needed our own Bank of England. We needed our own public debt. And all these institutions of Europe that they had fled, they wanted to adopt in this country as long as they could be in charge.
Those of you who have seen the movie, History of the World, Part II, starring Mel Brooks, you might remember Mel Brooks plays the king of France in one scene, and he keeps saying, it's good to be the king.
And that's how I think of Hamilton and his followers.
They fought a revolution against the king, but then they said,
you know, it is good to be the king, if you can be the king.
It's not a bad idea.
And these people were smoked out from the very beginning
by Thomas Jefferson and his compatriots,
his political compatriots.
There's a politician from Georgia named James Jackson
said this after observing what Hamilton was up to.
He said, what was it that drove our forefathers to this country?
Was it not the ecclesiastical core and perpetual monopolies of England and Scotland?
Shall we suffer the same evils in this country?
And so they understood this.
In fact, the American Constitutional Convention considered giving the U.S. Congress
the right to create a national bank and they rejected it.
So it was explicitly rejected, you know, by the Constitutional Convention.
But Hamilton began making the case for a bank run by politicians in the nation's capital.
And Thomas Jefferson and John Randolph vigorously opposed him.
Randolph was another Virginia politician, pretty well known.
And so George Washington asked Hamilton to respond, to make the case for a central bank, a national bank.
And he did, and he wrote a 15,000-word essay. That's what I meant when I said he was sort of a frenetic energy, and he was an impulsive statist.
George Washington says, make the case for a bank. He sits down and writes 15,000 words.
And there was a debate between him and Jefferson, and what the debate came down to was Jefferson argued that there's nothing in the Constitution that allows for a bank.
In fact, the bank was considered during the Constitutional Convention and then rejected.
So, of course, there's no case that this is a constitutional function of the U.S. government.
And Hamilton, who was a lawyer, hold your booze, please, the crux of his opinion was that,
well, Jefferson needs to read the necessary and proper clause of the U.S. Constitution more carefully.
and gives the government the power to do whatever is necessary and proper to carry out the delegated functions of the government.
There are there are 18 delegated functions that the states, the citizens of the states, delegated certain powers to the central government, primarily for foreign policy.
And so this necessary and proper clause, excuse me, says, well, the government can do what's necessary to carry these out.
And what Webster's dictionary defines the word necessary is meaning essential, indispensable, inevitable, and required.
And Jefferson pointed this out, these kinds of definitions out, and Hamilton responded by saying, well, that's a matter of opinion.
And it's kind of reminiscent of Bill Clinton saying, it depends on what the meaning of is is, if you remember that, during his deposition, it was on television.
Hamilton was one of the first to use this sort of lawyerly language, and he went on to say that the powers enumerated in the Constitution ought to be construed, quote, on principles of liberal construction.
He invented the notion of implied powers of the Constitution. So here was Jefferson and James Madison and John Randolph saying, well, here's the Constitution.
There's nothing in here that gives the government the power for a central bank.
and Hamilton responded by saying, well, you need to read between the lines.
Jefferson would come back and said, I have read between the lines.
There's nothing but blank space there.
There's no authority to do that.
Hamilton, he didn't really win the argument, but he won the day politically.
We did get the bank.
We did get the first bank of the United States.
The way in which George Washington went along with it was he owned Mount Vernon as his property.
You can visit Mount Vernon today near Alexandria, Virginia.
There was a deal with regard to moving the nation's capital from New York City to Virginia.
Washington wanted to make sure that the District of Columbia would run up right adjacent to
his property because, of course, that would make it much more valuable.
In return for the Federalists going along with, who wanted to keep, most of whom wanted
to keep the nation's capital in New York City, which is where they were primarily from, New
York City and New England, they moved the capital to Virginia and in return for promising
it to make the border right next, you know, butt up to George Washington's property, George
Washington signed off on the Bank of the United States, he didn't oppose it, he favored it.
So they ended up with the Bank of the United States, and Murray Rothbard, in his history
of money and banking in the United States, talks about, well, what happened next?
We got the bank.
We got our first central bank.
He said, the Bank of the United States promptly fulfilled its inflationary potential by issuing
millions of dollars in paper money and demand deposits, pyramiding on top of two million
in specie, gold and silver.
The bank invested heavily in loans to the United States government, monetizing the debt.
In addition, the $2 million invested in the assumption of pre-existing long-term debt
assumed by the new federal government, the bank engaged in massive temporary lending
to the government, which reached $6.2 million by 1796-1791 was the year the bank was created.
The result of the outpouring of credit and paper money by the new bank of the United
of States was an increase in prices of 72% from 1791 to 1796 and so it immediately created
inflation right off the back and so it was ended, it had a 20 year charter and it was
ended but then the War of 1812 came under which, where the Canadians in the room probably
I understand this, that we tried to conquer Canada and it ended up with the war of 1812 and there was a big war debt and so they resurrected the bank in 1816 to help pay for the war debt from the war of 1812 and so the bank and then, so the second bank of the United States, people got a taste of it during the first go around, the first 20 years and the concern was always not just economic instability, it was also
Corruption, because it was a source of patronage, it was a source of printing money to patronize various businesses, agricultural interests and so forth around the region that were supportive of the government and not necessarily based on any sort of economic reasoning.
And so, during the second bank, second wave of this Bank of the United States, James J. Kilpatrick, who wrote a book on the history of state government in America, he writes about what he calls a wave of hostility toward the Bank of the United States, which swept through the country.
Several states in the United States amended their constitutions to prohibit the Bank of the United States from coming into their states.
There was such hostility toward this institution.
And the state of Ohio sort of took the lead in opposition to this bank.
The bank had opened up two branches of Hamilton's bank.
He was dead by now. He died in 1804, so this is his legacy I'm talking about.
They opened up two branches in the state of Ohio and the state of Ohio did not want these
branches of this federal government bank destabilizing its regional economy and being used as a political
patronage tool in Ohio and so they imposed a $50,000 a year tax on each branch and this
is in the 1820s and so $50,000 is a good piece of change in the 1820s.
The Bank of the United States refused to pay the tax, and so the state of Ohio sent armed
marshals into the Bank of the United States with a big chest, an empty chest, and they
helped themselves to the vault. They hopped over the counter, and they took a hundred
thousand dollars out of the vault of the Bank of the United States, and this led to some
sort of a constitutional crisis over whether or not this bank was constitutional or not.
Can they do this? Can they tax the bank of the United States?
Another chapter of my book is entitled Hamilton's Disciple, How John Marshall Subverted the American Constitution.
Marshall was a disciple, really a disciple of Hamilton's political theories, and he stepped in.
He was the Chief Justice of the United States at this point.
There was a US Supreme Court case called McCulloch v. Maryland.
and the Federal Reserve Bank of the United States of America.
And I think that's a great example of how the bank was formed.
Maryland had done something similar to what Ohio did.
And one of the things that comes out of Marshall's opinion,
he had the opinion that the bank was constitutional here.
One of his statements that's kind of famous,
at least among students of American history,
he said the power to tax involves the power to destroy.
And he was saying, well, this is a bad thing.
But this was right.
And of course the people of Ohio would have said, well, yes, exactly, that's our intent.
But he would say, no, that's a bad thing to destroy this bank.
But President Andrew Jackson at the time, this is an interesting thing that most people don't know about American politics,
he pretty much thumbed his nose at John Marshall. He pretty much said, thank you for your opinion,
but that's just your opinion, and my opinion is different, and I'm the President of the United States.
So there. In another case where Marshall pontificated, and Marshall tried to set him up, by the way, as the sole arbiter of constitutionality in America.
In another case, Marbury versus Madison, he claimed that the U.S. Supreme Court alone should decide issues of constitutionality, meaning himself, the Chief Justice.
And on another case, Andrew Jackson said, well, Mr. Marshall has made his opinion, now let him try to enforce it.
And so we did not, Americans did not look at the Supreme Court as black robe deities like they do now,
where we're all supposed to genuflect every time they come out with one of their statements.
And so what happened was this bank was destroyed.
This bank was destroyed by Andrew Jackson, who vetoed the bill that would have returned the bank for another 20 years.
And so that worked. It was a big success.
And Jackson himself, he's been, some American historians sort of belittle Jackson as so he was from Tennessee.
And there's this culture in America that everything in the South is sort of backwards, you know.
What do these people from Alabama know about anything?
And there's no culture there and there's no intelligent life in the South.
And of course, Andrew Jackson, being a southern president from the 19th century, would fit into that.
But here's a quote I'd like to read of what Andrew Jackson said about why it is he vetoed the rechartering of America's first central bank.
It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes.
Distinctions in society will always exist under every just government.
Equality of talents, of education, or of wealth cannot be produced by human institutions, but every man is equally entitled to protection by law.
But when the laws undertake to add to these natural and just advantages,
Advantages, Artificial Distinctions to grant titles, gratuities, and exclusive privileges
to make the rich richer and the potent more powerful.
The humble members of society who have neither the time nor the means of securing like favors
from the government to themselves have a right to complain of the injustice of their government.
If government would confine itself to equal protection, it would be an unqualified blessing.
In the act before me, that is, recharging the bank, there seems to be a wide and unnecessary
departure from these just principles, end quote.
So he recognized this as a tool of mercantilism, essentially, of the government dispensing
favors to the people on Wall Street, primarily, and he thought this was unjust, and no uneducated
hayseed could write anything like that, I don't think.
And so the legacy of this first central bank in America was inflation, debasement of the
currency and a perpetual boom and bust problem.
Another one of Murray Rothbard's books, it was his doctoral dissertation actually, The
Panic of 1819.
It's all about how the Bank of the United States created the Panic of 1819, which was
the very first real depression created in America.
So this monster started creating boom and bust cycles and debasing the currency from the
very first, from the very beginning of its creation.
And it also tried to manipulate politics.
Part of the reason why Jackson, Andrew Jackson, got rid of it was that it was so blatant that
this Bank of the United States was literally financing the political campaign propaganda
Andrew Jackson's Opponents in Politics
It was as though, you know, two people running for president
and you have a big special taxpayer capitalized bank
that finances the campaign of one candidate
but not the campaign of the other candidate
That's pretty corrupt
That's exactly what they were doing
And so not only did it cause this boom and bust cycle in the economy
and debase the currency
but it was thoroughly corrupting politics as well
as it does today modern-day economists talk about the political business cycle
that is that is caused by by the central bank now if I could fast forward a
little bit Jackson destroyed this bank and then for about 20 years there was in
the US there was a period it was called free banking it was a much less heavily
regulated by the central government I don't have time to get into it but it
was resurrected the central banking was resurrected during the American I call
The National Currency Act and the main sponsors of the National Currency Act in the 1860s thanked Hamilton as being their inspiration for this.
One of the promoters of these acts was a congressman from New York City who just happened by sheer accident to be a banker.
Professor, his name was Elbridge G. Spalding, and what he did, he invoked Hamilton as, quote,
his authority for constitutional interpretation with regard to making the constitutional case
for the bank. So they're very explicit about that. Another proponent of this was Senator
John Sherman. He was the chairman of the Senate Finance Committee. He was the brother of the
by the famous General Sherman of Civil War fame in the U.S.
And he said this,
History teaches us that the public faith of a nation alone
is not sufficient to maintain a paper currency.
He said there must be a combination
between the interests of private individuals and the government,
a community of interest between the stockholders of banks,
the people and the government, he said.
So he was repeating Hamilton's theory
of tying the affluent people of the country to the government
through the combination of public debt and the central bank.
And so these were the political descendants of Alexander Hamilton.
When the New York Times celebrated the resurrection of central banking,
this is what they wrote on March 9th, 1863.
They said, this policy crystallized the centralization of power,
such as Hamilton might have eulogized as magnificent.
That was always the purpose, this centralization of political power in the nation's capital was always the purpose of the whole thing and modern, you know, you don't have to only restrict yourself to studying the Austrian School of Economics to understand these issues.
There was a book published in the 1990s that had an essay in it by three very distinguished monetary economists, including Anna Schwartz, who was sort of a co-author with Milton Friedman for many years.
Walter Block will discount what I'm going to say now since it was sort of related to Milton Friedman. He's the anti-Friedman.
Although Walter and I knew Milton. He's a charming guy. We liked him and rose with wonderful people.
We just have disagreements over certain things.
But anyway, this book published by a prestigious university press, one of the essays in it evaluated essentially Hamilton's bank
and its operation and its legacy, including these national currency acts that brought up the greenbacks in the 1860s.
This was all Hamilton's central bank. What is the legacy, the economic legacy of this bank that existed before we got the Fed?
We got the Fed in the U.S. in 1913. And here's what they said.
They said that the whole system, quote, was characterized by monetary and cyclical instability,
poor banking panics, frequent stock market crashes, and other financial disturbances,
end quote.
And so that was the history of it from the time, from the 18th century, 1791 until 1913.
And so therefore, that was the history, the legacy of central banking.
So what did we do in 1913? We said, well, the obvious solution to monetary and cyclical
instability for banking panics, frequent stock market crashes and other financial disturbances
is even more of that. You know, let's give them even more power. And that's what we did
with the creation of the Federal Reserve Board in 1913 where the Mises Institute once had
a conference there on the Fed at Jekyll Island, Georgia, which is where the conspirators got
together to plot the Fed and there are actually pictures of all these people in the room where
we sat at one point of all the men from the banking industry and elsewhere who were there
who were sort of the founding fathers of the Central Bank of America, the Fed and to this
day I swear that when we were in that room in some of these big portraits the eyeballs
were moving back and forth as we as some of them are going around in circles as Walter
Walter Block was giving a talk about it, but that's about all, my time is about up, thank you very much.