WEBVTT NOTE 6. Monetary and Banking Thought, II: The Bullion Report and the Return to Gold (continued) 1 00:00:00.000 --> 00:00:08.840 4. Questioning Fractional Reserve Banking, Britain and the United States 2 00:00:08.840 --> 00:00:14.520 Great Britain had now experienced the pain and deprivation of what would become a classic 3 00:00:14.520 --> 00:00:22.200 business cycle, that is, the expansion of money, the rise in prices, the euphoric boom, 4 00:00:22.200 --> 00:00:28.320 all fueled by the monetary inflation of a fractional reserve banking system, succeeded 5 00:00:28.320 --> 00:00:36.140 by a Monetary Contraction with Attendant Depression, Fall in Prices, Bankruptcies, Unemployment 6 00:00:36.140 --> 00:00:38.560 and Dislocations. 7 00:00:38.560 --> 00:00:46.380 And behind this boom and bust, guiding, organizing, centralizing and directing the monetary expansion 8 00:00:46.380 --> 00:00:54.540 and contraction was the powerful central bank, created and privileged by the central government. 9 00:00:54.540 --> 00:01:00.540 In short, it was forcefully impressed upon the public that fractional reserve banks, 10 00:01:00.540 --> 00:01:08.540 especially when organized under a central bank, can and do create and then destroy money, 11 00:01:08.540 --> 00:01:13.540 distorting and impoverishing the public and the economy in their wake. 12 00:01:13.540 --> 00:01:19.540 It is no wonder that severe critics of fractional reserve banking quickly arose, 13 00:01:19.540 --> 00:01:28.140 Indicating the Bank's actions and the system itself, and noting their responsibility for the boom-bust cycle. 14 00:01:28.140 --> 00:01:35.460 Professor Frank W. Fetter notes the ground swell of criticism of all banks, but he describes 15 00:01:35.460 --> 00:01:41.980 the invective against banks as exploiters of the common people with an air of bemusement 16 00:01:41.980 --> 00:01:44.540 at the public's irrationality. 17 00:01:44.540 --> 00:01:48.900 But surely this populist invective was well justified. 18 00:01:48.900 --> 00:01:54.600 The banks were, indeed, privileged by the government, enabled to inflate, and thus to 19 00:01:54.600 --> 00:02:01.820 set in motion a two-fold great injury upon the public, an inflationary boom dislocating 20 00:02:01.820 --> 00:02:08.300 production and investment and wiping out the savings of the thrifty, followed by a painful 21 00:02:08.300 --> 00:02:14.740 contractionary bust necessary to correcting the distortions of the boom. 22 00:02:14.740 --> 00:02:20.540 All of this could properly be laid to the door of the privileged central bank run fractional 23 00:02:20.540 --> 00:02:23.440 reserve banking system. 24 00:02:23.440 --> 00:02:30.060 Looked at in that light, the radical denunciations of banks without benefit of economic analysis 25 00:02:30.060 --> 00:02:35.300 look more like a deeper level of analysis than Fetter realizes. 26 00:02:35.300 --> 00:02:39.760 Fetter describes these opponents of banking as follows. 27 00:02:39.760 --> 00:02:45.940 The idea appeared increasingly that banks deprived the public of its natural metallic 28 00:02:45.940 --> 00:02:51.660 money and had created paper money as an instrument of oppression. 29 00:02:51.660 --> 00:02:56.980 Men who were far apart on most points were in agreement that somebody was making too 30 00:02:56.980 --> 00:03:00.380 much money from the paper money system. 31 00:03:00.380 --> 00:03:06.940 The restrained criticism of Ricardo under James Mill's urgings of the bank's profits, 32 00:03:06.940 --> 00:03:13.060 The strictures of obscure pamphleteers that bankers appear to be infinitely more mischievous 33 00:03:13.060 --> 00:03:20.420 than the coiners of base money, that is, counterfeiters of coin, and that both the Bank of England 34 00:03:20.420 --> 00:03:26.540 and the country banks had made unfair gains from the restriction measure, the wholesale 35 00:03:26.540 --> 00:03:33.020 invective of cobbit against bankers as a class, and the denunciations in Jonathan Wooler's 36 00:03:33.020 --> 00:03:57.020 In 1819, when parliament was considering resumption, Sherwin's political register offered this advice. 37 00:03:57.020 --> 00:04:07.020 Let our tyrants turn their infamous paper into coin of the same weight and fineness as that of which the people have been deprived. 38 00:04:07.020 --> 00:04:19.020 Fetter indicts the radical hard-money journalist William Cobbett for alleged inconsistency in bitterly denouncing the restriction and the bank's inflation 39 00:04:19.020 --> 00:04:26.020 and then attacking the bank for deflating after the war and causing further distress. 40 00:04:26.020 --> 00:04:46.020 Yet there is no real inconsistency in attacking the central bank and the fractional reserve banks for first inflating and then contracting, for that is precisely what they had done, and the entire distress of the boom-bust cycle can thus be laid at their doors. 41 00:04:46.020 --> 00:05:15.020 Knowingly or not, these radical critics of fractional reserve banking were simply revising and applying the great tradition of hostility to fractional reserve banking and devotion to 100% reserve in 18th century Britain, for example, Hume, Harris, Vanderlint, a tradition that had been unfortunately derailed by Adam Smith's apologetics for bank paper. 42 00:05:15.020 --> 00:05:27.020 In France, the 100% reserve anti-bank tradition had already been revived, as we have seen, by J.B. Say and Destut de Tracille. 43 00:05:27.020 --> 00:05:33.020 In the United States, meanwhile, similar conditions were bringing about similar results. 44 00:05:33.020 --> 00:05:42.020 The United States, too, had entered the Napoleonic Wars in 1812 and subsequently experienced wartime boom, 45 00:05:42.020 --> 00:05:47.220 in Convertible Bank Notes and Comparable Grievous Inflation. 46 00:05:47.220 --> 00:05:52.660 The difference was that the United States had managed to get rid of its central bank, 47 00:05:52.660 --> 00:05:56.420 the first bank of the United States, in 1811. 48 00:05:56.420 --> 00:06:01.540 So it achieved inflationary results by the Federal governments permitting the private 49 00:06:01.540 --> 00:06:09.940 banks to suspend specie payments in August 1814, allowing them to continue in operation 50 00:06:09.940 --> 00:06:16.140 and expand credit without having to redeem their notes or deposits. 51 00:06:16.140 --> 00:06:21.180 This intolerable situation was allowed to continue for two years after the end of the 52 00:06:21.180 --> 00:06:28.820 war until February 1817, at which point the Madison administration made an inflationary 53 00:06:28.820 --> 00:06:32.020 compact with the nation's banks. 54 00:06:32.020 --> 00:06:37.900 The compact provided that the United States would re-establish a privileged second bank 55 00:06:37.900 --> 00:06:44.100 Bank of the United States, which would then proceed to inflate credit by at least an agreed 56 00:06:44.100 --> 00:06:51.460 upon amount, in return for the banks graciously consenting to resume meeting their contractual 57 00:06:51.460 --> 00:06:55.980 obligations to pay their debts in specie. 58 00:06:55.980 --> 00:07:02.540 An inflationary boom, fueled by an expanding second bank, ensued, to be followed by the 59 00:07:02.540 --> 00:07:09.820 The Catastrophic Panic of 1819 in which the second bank was forced to contract suddenly 60 00:07:09.820 --> 00:07:12.940 in order to save itself. 61 00:07:12.940 --> 00:07:20.020 The Panic of 1819 confirmed Thomas Jefferson's hostility to fractional reserve banking, and 62 00:07:20.020 --> 00:07:26.180 we have seen how he and his friend and old opponent, John Adams, both declared their 63 00:07:26.180 --> 00:07:33.720 Their Enthusiasm for Distute de Tracis, Ultra-Hard Money Treatise on Economics. 64 00:07:33.720 --> 00:07:39.500 Jefferson was moved by the panic to draw up a remedial Plan for Reducing the Circulating 65 00:07:39.500 --> 00:07:45.540 Medium, which he asked his friend, William Cabell Reeves, to introduce into the Virginia 66 00:07:45.540 --> 00:07:50.140 legislature without disclosing his authorship. 67 00:07:50.140 --> 00:07:56.940 The goal of the plan was bluntly stated as the eternal suppression of bank paper. The 68 00:07:56.940 --> 00:08:02.940 method was to reduce the circulating medium to the level of specie proportionately over 69 00:08:02.940 --> 00:08:09.540 a five-year period, until paper money was withdrawn completely and totally redeemed 70 00:08:09.540 --> 00:08:17.220 in specie. After that, the money in circulation would consist solely of specie. 71 00:08:17.220 --> 00:08:20.140 John Adams agreed wholeheartedly. 72 00:08:20.140 --> 00:08:26.700 In a letter to his old opponent, the great libertarian Jeffersonian anti-bank and anti-tariff 73 00:08:26.700 --> 00:08:35.940 theoretician John Taylor of Caroline, Adams blamed the banks for the 1819-1820 depression. 74 00:08:35.940 --> 00:08:42.820 He attacked any issue of paper money beyond specie in the bank as theft, a position he 75 00:08:42.820 --> 00:08:46.120 had elaborated years earlier. 76 00:08:46.120 --> 00:08:51.360 Every dollar of a bank bill that is issued beyond the quantity of gold and silver in 77 00:08:51.360 --> 00:08:58.800 the vaults represents nothing and is therefore a cheat upon somebody. 78 00:08:58.800 --> 00:09:04.280 Jefferson's close friend and son-in-law, Governor Thomas Randolph of Virginia, summed up in 79 00:09:04.280 --> 00:09:12.320 his inaugural address of December 1820 the predominant Virginia attitude toward banks. 80 00:09:12.320 --> 00:09:18.840 Randolph pointed out that specie, in universal demand, had a relatively stable value, whereas 81 00:09:18.840 --> 00:09:27.060 banks caused great fluctuations in the supply and value of paper money, with attendant distress. 82 00:09:27.060 --> 00:09:32.520 Randolph endorsed not only the collection of all taxes in specie, which later, on the 83 00:09:32.520 --> 00:09:39.760 Federal level, became the independent treasury plan, but also envisioned a currency backed 84 00:09:39.760 --> 00:09:43.360 100% in specie. 85 00:09:43.360 --> 00:09:49.800 But the most important impact of the panic of 1819 on American thought was not simply 86 00:09:49.800 --> 00:09:54.980 to reconfirm the hard money advocates of the older generation. 87 00:09:54.980 --> 00:10:01.160 It was to generate and stimulate a new, mighty, ultra-hard money movement, which would later 88 00:10:01.160 --> 00:10:07.040 become the Jacksonian movement of the 1830s and 1840s. 89 00:10:07.040 --> 00:10:13.620 The goal of the Great Jacksonian Movement was a monetary system consisting wholly of gold, 90 00:10:13.620 --> 00:10:18.860 or of 100% gold-backed notes or deposits. 91 00:10:18.860 --> 00:10:24.900 Its first goal, achieved after great struggle in the 1830s, was to eliminate the Second 92 00:10:24.900 --> 00:10:27.340 Bank of the United States. 93 00:10:27.340 --> 00:10:33.340 Its second, largely achieved a decade later, was to separate the Federal Government totally 94 00:10:33.340 --> 00:10:41.440 from the banking system by confining its receipts and monetary transactions solely to specie, 95 00:10:41.440 --> 00:10:48.660 the independent treasury. Its final goal, only partially achieved, was to outlaw fractional 96 00:10:48.660 --> 00:10:55.020 reserve banking altogether, a goal that might well have succeeded if the democratic party 97 00:10:55.020 --> 00:10:59.500 had not been fatally sundered by the slavery issue. 98 00:10:59.500 --> 00:11:05.820 A remarkably large number of future Jacksonian leaders learned their anti-bank, hard-money 99 00:11:05.820 --> 00:11:11.460 views from experiencing the Panic of 1819. 100 00:11:11.460 --> 00:11:20.460 General Andrew Jackson, 1767-1845, himself a wealthy Nashville, Tennessee cotton planter, 101 00:11:20.460 --> 00:11:25.660 adopted his lifelong anti-bank views as a result of the panic. 102 00:11:25.660 --> 00:11:32.180 Indeed, he quickly became the fervent leader of the opposition to inconvertible state paper 103 00:11:32.180 --> 00:11:37.740 in Tennessee, as well as to laws for relief of debtors. 104 00:11:37.740 --> 00:11:45.620 Top Jacksonian Senator Thomas Hart Benton, 1782 to 1858, of Missouri, affectionately 105 00:11:45.620 --> 00:11:52.140 termed Old Bullion for his devotion to gold and hard money, and who was slated to be Martin 106 00:11:52.140 --> 00:11:59.100 Van Buren's Jacksonian successor in the presidency was converted from his previous inflationist 107 00:11:59.100 --> 00:12:03.260 views by the Panic of 1819. 108 00:12:03.260 --> 00:12:12.780 And young future Jacksonian and eventual President James K. Polk, 1795-1849, a wealthy cotton 109 00:12:12.780 --> 00:12:19.460 planter, began his political career in the Tennessee Legislature in 1820 by advocating 110 00:12:19.460 --> 00:12:24.620 A Speedy Return to Specie Payments 111 00:12:24.620 --> 00:12:30.460 Historians have had great difficulty interpreting the essential nature of the Jacksonian movement, 112 00:12:30.460 --> 00:12:36.880 or for that matter the economic views of Thomas Jefferson and the Jeffersonians. Jefferson, 113 00:12:36.880 --> 00:12:42.720 for example, has been generally perceived as a devoted agrarian opposed to commerce 114 00:12:42.720 --> 00:12:49.020 and manufacturing, and Jeffersonian John Taylor of Caroline has been labeled in the same 115 00:12:49.020 --> 00:13:04.020 In reality it is hard to see how any agrarian can be opposed to a commerce essential to exporting farm products as well as importing manufactured and other goods to the farmers. 116 00:13:04.020 --> 00:13:16.020 It is true that Jefferson, Taylor and others were devoted farmers and personally disliked cities, but they were not opposed to either commerce or industry. 117 00:13:16.020 --> 00:13:24.020 What they were opposed to was governmental subsidy and artificial force-feeding of industrial or urban growth. 118 00:13:24.020 --> 00:13:31.020 The Jeffersonians favored laissez-faire, private property rights and the free market, 119 00:13:31.020 --> 00:13:39.020 and were therefore opposed to governmental subsidies, protective tariffs and cheap inflationary bank credit. 120 00:13:39.020 --> 00:13:50.020 The Jacksonians, too, had strict laissez-faire views, except that there were naturally proportionately more who lived in cities or worked in industry. 121 00:13:50.020 --> 00:13:57.020 Jacksonians have been variously and even chaotically interpreted by historians as being 122 00:13:57.020 --> 00:14:06.020 a. wild-eyed agrarian hillbillies opposed to commerce and capitalism, historians at the turn of the 20th century 123 00:14:06.020 --> 00:14:14.100 B. Pre-New Dealers Interested in Forging a Worker-Farmer Uprising Against National Republican 124 00:14:14.100 --> 00:14:22.580 Whig Capitalism, Arthur Schlesinger Jr. C. Spokesmen for Rising Entrepreneurs and Private 125 00:14:22.580 --> 00:14:30.140 State Chartered Banks, Trying to Throw Off Central Bank Shackles Upon State Bank Inflation, 126 00:14:30.140 --> 00:14:32.140 Bray Hammond 127 00:14:32.140 --> 00:14:38.800 The wild inconsistencies of these interpretations stem from most historians conflating the free 128 00:14:38.800 --> 00:14:42.100 market and state capitalism. 129 00:14:42.100 --> 00:14:48.740 The Jeffersonians and Jacksonians were not anti-capitalist but ardently in favor, but 130 00:14:48.740 --> 00:14:55.380 to them, in contrast to their enemies, the Federalists and Whigs, genuine capitalism 131 00:14:55.380 --> 00:15:02.980 Capitalism occurs only when commerce and manufacturing are free, free of both subsidies and constricting 132 00:15:02.980 --> 00:15:04.980 controls. 133 00:15:04.980 --> 00:15:11.580 Whereas Federalists and Whigs were mercantilists who favored state capitalism, cheap credit, 134 00:15:11.580 --> 00:15:18.160 protective tariff, a national debt and big government, the Jeffersonians and Jacksonians 135 00:15:18.160 --> 00:15:25.120 Those were free market or laissez-faire capitalists who wanted capitalism and economic growth 136 00:15:25.120 --> 00:15:32.720 to develop only under freedom and free markets, that is, under a system of free trade, free 137 00:15:32.720 --> 00:15:38.320 enterprise, ultra-minimal government and ultra-hard money. 138 00:15:38.320 --> 00:15:45.000 Neither was Jefferson or Jacksonian leadership in any way ignorant or hillbilly. 139 00:15:45.000 --> 00:16:02.000 and himself, as well as most of the other leaders, was thoroughly familiar with the literature of the bullionist controversy, as well as the economic classics, and most of the younger generation of bright economic thinkers and writers were in the Jacksonian camp. 140 00:16:02.000 --> 00:16:27.000 Thus Amos Kendall, influential editor of the Frankfurt, Kentucky, Argus, and later to be one of the leading brain-trusters in President Jackson's kitchen cabinet, and his main advisor in the bank war, became a bitter opponent of the banking system as a result of the Panic of 1819, the very thought of banks he now found disgusting. 141 00:16:27.000 --> 00:16:34.680 The best method of rendering them harmless, he concluded, was simply to prohibit them by constitutional amendment. 142 00:16:34.680 --> 00:16:44.360 If this were not feasible, then the banks should be required to post security with the courts, enabling them to redeem all their paper. 143 00:16:44.360 --> 00:16:58.040 One of America's first economists, Condé Ragé, 1784-1842, found his economic outlook totally transformed by the panic of 1819. 144 00:16:58.040 --> 00:17:08.120 A Philadelphia merchant and attorney of French descent, Ragé had published in 1815 an inflationist and protectionist tract, 145 00:17:08.120 --> 00:17:13.600 an inquiry into the causes of the present state of the circulating medium. 146 00:17:13.600 --> 00:17:31.600 But in the midst of the panic, Ragé, as State Senator from Philadelphia, headed a committee in 1820 and 1821 that looked closely into the causes of and possible remedies for the unprecedented economic depression. 147 00:17:31.600 --> 00:17:38.600 Raguet concluded that the Depression had been caused by bank credit expansion in the boom, 148 00:17:38.600 --> 00:17:45.600 followed by a subsequent contraction when the boom caused specie to drain out of the bank vaults. 149 00:17:45.600 --> 00:17:52.600 As a result, Raguet emerged from the Depression a dedicated opponent of fractional reserve banking 150 00:17:52.600 --> 00:17:55.600 and a convinced partisan of free trade. 151 00:17:55.600 --> 00:18:13.600 He was impressed that out of the leading citizens and legislators of nineteen counties to whom the Raguez committee sent a questionnaire, sixteen counties replied flatly that the advantages of the banking system did not outweigh its evils. 152 00:18:13.600 --> 00:18:31.600 From then on, Ragé favored 100% reserve banking to Specie, and while not a Jacksonian politically, staunchly supported the Jacksonian independent treasury plan that divorced the treasury from banks or bank paper. 153 00:18:31.600 --> 00:18:39.800 Raguet later expanded his views in his Of the Principles of Banking, 1830, A Treatise on 154 00:18:39.800 --> 00:18:49.960 Currency and Banking, 1839 and 1840, Principles of Free Trade, 1835, and in a series of journals 155 00:18:49.960 --> 00:18:55.880 which he launched in the late 1830s which included a documentary history of the current 156 00:18:55.880 --> 00:19:02.440 and Commercial Crisis, as well as reprints of Ricardo and other monetary theorists and 157 00:19:02.440 --> 00:19:05.260 of the Bullion Report. 158 00:19:05.260 --> 00:19:11.580 Raguet explained in his Treatise on Money and Banking how expansion of bank credit brought 159 00:19:11.580 --> 00:19:18.840 about a boom, higher prices, a demand to export specie and a consequent call upon the banks 160 00:19:18.840 --> 00:19:22.800 for specie contraction and crisis. 161 00:19:22.800 --> 00:19:30.160 Remarkably he also anticipated James Wilson of The Economist by almost a decade in demonstrating 162 00:19:30.160 --> 00:19:36.680 in a pre-Austrian treatment of the business cycle how the boom brought about over-investment 163 00:19:36.680 --> 00:19:39.000 in fixed capital goods. 164 00:19:39.000 --> 00:19:41.560 Thus, Raguet wrote, 165 00:19:41.560 --> 00:19:47.840 At the winding up of the catastrophe it is discovered that during the whole of this operation 166 00:19:47.840 --> 00:19:54.640 Consumption has been increasing faster than production, that the community is poorer in 167 00:19:54.640 --> 00:20:01.720 the end than when it began, that instead of food and clothing it has railroads and canals 168 00:20:01.720 --> 00:20:07.540 adequate for the transportation of double the quantity of produce and merchandise than 169 00:20:07.540 --> 00:20:13.720 there is to be transported, and that the whole of the appearance of prosperity which was 170 00:20:13.720 --> 00:20:20.160 was exhibited while the currency was gradually increasing in quantity, was like the appearance 171 00:20:20.160 --> 00:20:26.880 of wealth and affluence which the spendthrift exhibits while running through his estate, 172 00:20:26.880 --> 00:20:33.540 and like it, destined to be followed by a period of distress and inactivity. 173 00:20:33.540 --> 00:20:38.440 The difference is that the more celebrated Wilson, a leader of the so-called Banking 174 00:20:38.440 --> 00:20:47.280 School of Britain never realized that the over-investment was caused by monetary and credit expansion. 175 00:20:47.280 --> 00:20:54.240 In short, he never caught up with Ragé and the Jacksonians in the United States. 176 00:20:54.240 --> 00:21:01.520 The Panic of 1819 also inspired the publication of the first systematic treatise on political 177 00:21:01.520 --> 00:21:08.820 Political Economy in the United States, Thoughts on Political Economy, 1820, by the Baltimore 178 00:21:08.820 --> 00:21:15.100 lawyer Daniel Raymond, 1786-1849. 179 00:21:15.100 --> 00:21:20.520 Raymond was born into a conservative Connecticut Federalist family, and his book was a peon 180 00:21:20.520 --> 00:21:26.960 to protective tariffs and to the nationalist Alexander Hamilton, whom Raymond considered 181 00:21:26.960 --> 00:21:31.320 the only truly sound political economist. 182 00:21:31.320 --> 00:21:37.360 But even Hamilton nodded, according to Raymond, on the bank question, and Raymond, too, came 183 00:21:37.360 --> 00:21:45.280 out in opposition to bank credit expansion and in favor of 100 percent specie banking. 184 00:21:45.280 --> 00:21:51.820 Criticizing Hamilton's and Adam Smith's assertion that banknotes add to the national capital 185 00:21:51.820 --> 00:21:59.140 by economizing on specie, Raymond cited David Hume's statement that, in proportion as money 186 00:21:59.140 --> 00:22:05.140 If money is increased in quantity, it must be depreciated in value. 187 00:22:05.140 --> 00:22:13.140 Bank credit also promotes extravagant speculation, raises prices of domestic goods in export markets, 188 00:22:13.140 --> 00:22:17.140 and brings about a deficit in the balance of trade. 189 00:22:17.140 --> 00:22:24.140 To Raymond, the issuing of any banknotes beyond specie was, quite simply, a stupendous fraud. 190 00:22:24.140 --> 00:22:37.140 Ideally, he believed that the federal government should eliminate bank paper entirely and supply the country with a national paper backed 100% by specie. 191 00:22:37.140 --> 00:22:52.140 As can be seen from the case of Raymond, it was not only the Jacksonians who came to staunch anti-fractional reserve bank position during the 1819 to 1821 depression. 192 00:22:52.140 --> 00:23:00.940 Young Frontier State Representative from Western Tennessee, Davy Crockett, 1786-1836, future 193 00:23:00.940 --> 00:23:06.820 Whig leader and enemy of the Jacksonians, stated that he considered the whole banking 194 00:23:06.820 --> 00:23:11.620 system a species of swindling on a large scale. 195 00:23:11.620 --> 00:23:21.080 Protectionist and future Whig president, General William Henry Harrison, 1773-1841, ran successfully 196 00:23:21.080 --> 00:23:25.980 for the Ohio State Senate in the autumn of 1819. 197 00:23:25.980 --> 00:23:31.760 When attacked at a local pre-election citizens meeting for being a director of a local branch 198 00:23:31.760 --> 00:23:37.880 of the Bank of the United States, Harrison, in a lengthy reply, insisted that he was a 199 00:23:37.880 --> 00:23:44.080 sworn enemy of all banks and especially of the Bank of the United States, and that he 200 00:23:44.080 --> 00:23:49.640 was unalterably opposed to its establishment and continuation. 201 00:23:49.640 --> 00:23:55.280 And finally, at least at this time, Secretary of State and future President John Quincy 202 00:23:55.280 --> 00:24:02.400 Adams fully shared his father's hostility to all fractional reserve banking. 203 00:24:02.400 --> 00:24:07.920 To a Frenchman who had sent him a plan for federal government paper money, Adams commended 204 00:24:07.920 --> 00:24:14.720 the famous Bank of Amsterdam, where paper was always a representative and nothing more 205 00:24:14.720 --> 00:24:25.600 of Specie in its Vaults 5. Monetary and Banking Thought on the Continent 206 00:24:25.600 --> 00:24:30.760 Monetary thought on the European continent often paralleled the richer and more developed 207 00:24:30.760 --> 00:24:37.540 controversy in Great Britain. In Sweden, notably enough, a bullionist controversy developed 208 00:24:37.540 --> 00:24:43.920 a half-century before the more famous one in Great Britain. Since few Britons were versed 209 00:24:43.920 --> 00:24:49.880 Based in the Swedish language, the controversy and its significance went unremarked outside 210 00:24:49.880 --> 00:24:51.600 Sweden. 211 00:24:51.600 --> 00:25:00.320 In the mid-18th century, Sweden experienced four decades, specifically 1739 through 1772, 212 00:25:00.320 --> 00:25:07.600 of roughly democratic government, with political power in the hands of the parliament or riksdag, 213 00:25:07.600 --> 00:25:15.360 and with representatives chosen from four estates, nobility, clergy, middle class and peasants. 214 00:25:15.360 --> 00:25:20.960 Two political parties battling for power in this era in the nomenclature reminiscent of 215 00:25:20.960 --> 00:25:25.760 Gulliver's travels were the Hats and the Caps. 216 00:25:25.760 --> 00:25:31.680 The Hats, who were in power from the beginning of the grandiloquently named Age of Freedom 217 00:25:31.680 --> 00:25:40.520 until 1765 were mercantilists who believed in using inflation for economic development. 218 00:25:40.520 --> 00:25:46.000 Export subsidies, direct subsidies, cheap loans and high protective tariffs were all 219 00:25:46.000 --> 00:25:52.600 used to build internal improvements and to foster favored industries, especially textile 220 00:25:52.600 --> 00:25:53.600 manufacturing. 221 00:25:53.600 --> 00:26:00.240 A favorite motto of the hats was, Swedish men in Swedish clothing. 222 00:26:00.240 --> 00:26:06.360 The choice method of financing these lavish expenditures was inflationary credit expansion 223 00:26:06.360 --> 00:26:09.280 by the Central Bank of Sweden. 224 00:26:09.280 --> 00:26:15.160 The convenient proto-Keynesian hat theory was that an increased money supply would all 225 00:26:15.160 --> 00:26:21.200 go into increased development and output rather than higher prices. 226 00:26:21.200 --> 00:26:26.360 As for the nagging thought that deficits might ensue in the balance of payments, there was 227 00:26:26.360 --> 00:26:32.600 There's no need to worry, since imports would be held down by direct government controls, 228 00:26:32.600 --> 00:26:40.600 while increased national income would, in some odd way, promote increased exports. 229 00:26:40.600 --> 00:26:46.000 After several years of inflationary bank credit expansion, the Swedish government went off 230 00:26:46.000 --> 00:26:53.280 the silver standard in 1745, and from then on was free to inflate ad libitum. 231 00:26:53.280 --> 00:27:03.360 Thus, total in-convertible banknotes in circulation in 1745 were $6.9 million, doubling until 232 00:27:03.360 --> 00:27:10.960 1754 when total circulation was $13.7 million. 233 00:27:10.960 --> 00:27:16.640 Monetary inflation accelerated after that, more than doubling in the next four years, 234 00:27:16.640 --> 00:27:21.280 reaching $33.1 million in 1758. 235 00:27:21.280 --> 00:27:33.300 Finally, the supply of banknotes reached a peak in 1762 at $44.5 million, a 545% increase 236 00:27:33.300 --> 00:27:41.700 over 1745, or an average of 32.1% per year. 237 00:27:41.700 --> 00:27:48.340 In response to the monetary expansion, prices remained stable for a few years and then rose 238 00:27:48.340 --> 00:27:59.440 from 1749 to 1756, the general price index rising 23% in the seven years. After that, 239 00:27:59.440 --> 00:28:05.500 as usually happens, the price rise accelerated, doubling in the next eight years and reaching 240 00:28:05.500 --> 00:28:13.460 a peak in 1764. The biggest concern was the foreign exchange rate, which rose even more 241 00:28:13.460 --> 00:28:24.260 Thus, after remaining only 5 or 6% above par from 1752 to 1755, the rate of Homburg 242 00:28:24.260 --> 00:28:35.380 Mark Bankos in terms of dollars rose to 247% above par in 1765. 243 00:28:35.380 --> 00:28:41.020 The fall in the foreign exchange value of the dollar led the Hatt government to attempt 244 00:28:41.020 --> 00:28:44.860 Direct Control of Foreign Exchange Rates 245 00:28:44.860 --> 00:28:52.540 A foreign exchange office was established in 1747 to try to push rates down, using massive 246 00:28:52.540 --> 00:28:58.460 French government subsidies to prop up dollars in the foreign exchange market. 247 00:28:58.460 --> 00:29:05.020 The exchange office succeeded for a few years, bringing the price of Hamburg-Markbankos down, 248 00:29:05.020 --> 00:29:17.820 for example, from 24% above par in 1748 to 5 or 6% above par from 1752 to 1755. 249 00:29:17.820 --> 00:29:23.860 But an artificially falling foreign exchange rate combined with rising domestic prices 250 00:29:23.860 --> 00:29:28.620 amounted to an enormous subsidy of imports into Sweden. 251 00:29:28.620 --> 00:29:33.940 The resulting huge deficit in the balance of payments raised the increasing problem 252 00:29:33.940 --> 00:29:58.080 It is interesting to see how the Hap Theoreticians, led by one Edward Runneberg, explained the 253 00:29:58.080 --> 00:30:00.380 mounting crisis. 254 00:30:00.380 --> 00:30:06.820 Like the anti-bullionists and the later banking school theorists in Britain, they, even more 255 00:30:06.820 --> 00:30:10.380 starkly, reversed the causal chain. 256 00:30:10.380 --> 00:30:16.620 The problem, the hats declared, originated in the deficit in the balance of payments. 257 00:30:16.620 --> 00:30:20.060 Where the deficit came from was far more murky. 258 00:30:20.060 --> 00:30:25.460 Presumably it was a willful act of greedy consumers and importers. 259 00:30:25.460 --> 00:30:31.400 The deficit then caused the price of foreign exchange to rise, which in turn raised the 260 00:30:31.400 --> 00:30:37.700 prices of domestic goods in export markets, which in turn pulled up all the prices of 261 00:30:37.700 --> 00:30:39.220 domestic goods. 262 00:30:39.220 --> 00:30:46.160 Hence, the entire domestic inflation was really due to the mysterious deficit in the balance 263 00:30:46.160 --> 00:30:47.880 of payments. 264 00:30:47.880 --> 00:30:55.200 The policy conclusion was clear to the hats, restrict imports by coercion. 265 00:30:55.200 --> 00:31:01.420 At once did the Hatt theoreticians admit that there could be a causal chain running from 266 00:31:01.420 --> 00:31:06.960 increased banknote issue to prices and exchange rates. 267 00:31:06.960 --> 00:31:13.520 On the contrary, the Hatt's advocated further issues in bank money to raise domestic production, 268 00:31:13.520 --> 00:31:20.720 which would in turn somehow increase exports and thereby increase foreign exchange earnings 269 00:31:20.720 --> 00:31:27.600 and, along with the coerced restriction of imports, cure the deficit. 270 00:31:27.600 --> 00:31:33.160 In addition to massive private credits, the inflation of money and credit by the Bank 271 00:31:33.160 --> 00:31:39.600 of Sweden financed government deficits, many of which were used for heavy Swedish military 272 00:31:39.600 --> 00:31:49.980 expenses to fight in the multinational Seven Years' War, 1756-1763. 273 00:31:49.980 --> 00:31:58.180 As the inflation began to accelerate in 1756, CAP political strength grew steadily in reaction 274 00:31:58.180 --> 00:32:06.260 not only to the inflationary spiral but also to participation in a widely unpopular war. 275 00:32:06.260 --> 00:32:11.780 The CAPs, who found their constituency among small merchants and civil servants injured 276 00:32:11.780 --> 00:32:18.500 by inflation, were in favor of free trade and laissez-faire and opposed to mercantilism 277 00:32:18.500 --> 00:32:21.140 and Government Controls. 278 00:32:21.140 --> 00:32:26.360 As the inflation proceeded, the caps were able to show how the government-engineered 279 00:32:26.360 --> 00:32:32.060 inflation aided privileged manufacturers with cheap bank loans. 280 00:32:32.060 --> 00:32:38.260 They also demonstrated how hat privileges and subsidies aided certain privileged commercial 281 00:32:38.260 --> 00:32:42.860 capitalists, especially iron exporters. 282 00:32:42.860 --> 00:32:48.380 Smaller industrialists, merchants and importers opposed to special privilege were the back 283 00:32:48.380 --> 00:32:51.460 Backbone of the Cap Party. 284 00:32:51.460 --> 00:32:59.380 Worried by rising cap power, the Hats finally stopped the monetary inflation in 1762, but 285 00:32:59.380 --> 00:33:05.860 prices and exchange rates continued to rise as expectations of further inflation still 286 00:33:05.860 --> 00:33:07.580 held sway. 287 00:33:07.580 --> 00:33:15.380 Finally, the Caps toppled the Hats in 1765 and promptly ended the inflation by a heroic 288 00:33:15.380 --> 00:33:24.380 Policy of Monetary Deflation, Lowering the Total Supply of Banknotes to $33.5 million 289 00:33:24.380 --> 00:33:34.380 in 1768, or a 25% drop in seven years, most of it since 1765. 290 00:33:34.380 --> 00:33:41.000 The result was, of course, a sharp deflation in prices and foreign exchange, the Mark Banco 291 00:33:41.000 --> 00:33:57.840 Output and unemployment declined sharply as well. 292 00:33:57.840 --> 00:34:02.960 Throughout this boom-bust cycle, the caps firmly took what would later be called the 293 00:34:02.960 --> 00:34:05.220 bullionist position. 294 00:34:05.220 --> 00:34:11.260 The excess issue of banknotes, especially with an inconvertible currency, brought about 295 00:34:11.260 --> 00:34:17.940 rises in price and in foreign exchange rates. As we have indicated, the caps were wisely 296 00:34:17.940 --> 00:34:25.220 not content with simply pointing out the economic flaws in the Hatt's reasoning. They also attacked 297 00:34:25.220 --> 00:34:31.520 the special privileges enjoyed by the Hatt's, and showed how the Hatt constituency benefited 298 00:34:31.520 --> 00:34:35.160 by Inflation and Mercantilism. 299 00:34:35.160 --> 00:34:41.280 The deflationary course taken by the caps in power may be economically justified by 300 00:34:41.280 --> 00:34:48.300 pointing out that drastic measures were necessary to reverse inflationary expectations. 301 00:34:48.300 --> 00:34:54.200 But the caps stressed another attractive political argument, retribution. 302 00:34:54.200 --> 00:34:59.920 Why shouldn't the wealthy hat merchants and industrialist profiteers from inflation pay 303 00:34:59.920 --> 00:35:05.680 pay the major price for a return to the silver standard and sound money. 304 00:35:05.680 --> 00:35:11.760 In this way, deflation would reward those who had suffered from inflation, and the profiteers 305 00:35:11.760 --> 00:35:18.080 from the previous inflation would, in a sense, pay reparations to compensate the previous 306 00:35:18.080 --> 00:35:20.600 victims of inflation. 307 00:35:20.600 --> 00:35:27.120 This was far from an absurd program, and so the cap set out, quite frankly, to deflate 308 00:35:27.120 --> 00:35:36.480 prices and exchange rates down to the pre-1745 hat inflation and to the old silver par with the dollar. 309 00:35:37.840 --> 00:35:41.840 Economically, too, the caps had an important argument. 310 00:35:41.840 --> 00:35:46.560 Since banknotes received their true value from their silver reserves, 311 00:35:46.560 --> 00:35:52.000 the dollar should always designate the same quantity or weight of specie. 312 00:35:52.000 --> 00:36:00.620 Two of the leading cap economists, however, argued against the deflation and instead suggested 313 00:36:00.620 --> 00:36:06.740 going back to silver at the existing rate of twice the old par. 314 00:36:06.740 --> 00:36:15.720 One was the Reverend Anders Czajdinius, 1729-1803, a Lutheran pastor from a small city on the 315 00:36:15.720 --> 00:36:21.360 of the Western Coast of Finland Coming from a coastal city in a Finland colonized 316 00:36:21.360 --> 00:36:28.080 by Sweden, the Kingdom of Sweden and Finland, and whose trade suffered from state privileges 317 00:36:28.080 --> 00:36:34.980 to Stockholm and other Swedish interests, Chidenius early spoke and wrote numerous pamphlets 318 00:36:34.980 --> 00:36:39.480 against mercantilism and in favor of free trade. 319 00:36:39.480 --> 00:36:46.280 He also propounded a philosophy of natural law and natural rights of every individual. 320 00:36:46.280 --> 00:36:53.560 In 1766, as a representative of the Finnish clergy in the Riksdag, Chidenius was censured 321 00:36:53.560 --> 00:37:01.200 and removed from Parliament for the flagrant crime in the Age of Freedom of writing a tract, 322 00:37:01.200 --> 00:37:07.520 the succor of the realm by a natural finance system, attacking the policy of deflation 323 00:37:07.520 --> 00:37:14.640 to the old par after he had voted for it. Apparently changing one's mind after a vote 324 00:37:14.640 --> 00:37:21.400 was not permissible. In the pamphlet, Chidenius, without benefit of having read or heard of 325 00:37:21.400 --> 00:37:28.840 Adam Smith, worked out some real bills notions of permissible banking in a convertible monetary 326 00:37:28.840 --> 00:37:30.560 system. 327 00:37:30.560 --> 00:37:35.520 The other cap opponent of deflation was a teacher of economics at the University of 328 00:37:35.520 --> 00:37:43.340 of Uppsala, Per-Niklas Kristiernan. Kristiernan began at Uppsala as an adjunct in law and 329 00:37:43.340 --> 00:37:51.520 economics in 1761, then rose to professor in the same field, then held a chair in philosophy 330 00:37:51.520 --> 00:37:59.440 and finally ended as Chancellor of the University. In contrast to the poorly read Chidinius, 331 00:37:59.440 --> 00:38:06.260 Christianen was steeped in such foreign economic literature as Cantillon, Hume, Eusty, Locke 332 00:38:06.260 --> 00:38:07.940 and Malin. 333 00:38:07.940 --> 00:38:14.820 In a pamphlet published in 1761, Summary of Lectures on the High Price of Foreign Exchange 334 00:38:14.820 --> 00:38:21.320 in Sweden, Christianen presented a theory of flexible exchange rates as an equilibrating 335 00:38:21.320 --> 00:38:28.720 mechanism in inconvertible currency that anticipated the bullionists and was superior to anything 336 00:38:58.720 --> 00:39:04.120 from the Bank's More Liberal Lending Policy, which lowered the rate of interest sharply 337 00:39:04.120 --> 00:39:12.400 by the mid-1750s, and also increased inflation by creating money to redeem all extant government 338 00:39:12.400 --> 00:39:13.400 bonds. 339 00:39:13.400 --> 00:39:19.360 Kristiernan, however, was far from a hard-core hard-money man. 340 00:39:19.360 --> 00:39:25.760 He defended banknotes as useful, increasing activity and employment, and opposed deflation 341 00:39:25.760 --> 00:39:31.680 Christian, because, he pointed out, prices and wages were sticky downward. 342 00:39:31.680 --> 00:39:38.040 It is doubtful, however, that downward stickiness could last for long in the 18th century. 343 00:39:38.040 --> 00:39:44.520 But Christian's main objection to deflation was that his ideal was not sound metallic 344 00:39:44.520 --> 00:39:51.600 money, but a pre-Freedmanite desire to stabilize the value of the dollar and make the price 345 00:39:51.600 --> 00:39:53.780 level constant. 346 00:39:53.780 --> 00:40:00.700 In pursuit of that goal, he urged open market operations by the central bank. Furthermore, 347 00:40:00.700 --> 00:40:07.380 again in anticipation of the monetarists, he admittedly preferred inflation to deflation, 348 00:40:07.380 --> 00:40:10.380 if that was the choice. 349 00:40:10.380 --> 00:40:17.540 Unfortunately the heroic deflationary measures led to temporary cap reverses. The hats came 350 00:40:17.540 --> 00:40:24.820 came back to power in 1769, but although they promptly re-inflated, they began to prepare 351 00:40:24.820 --> 00:40:29.100 seriously for restoration of the silver standard. 352 00:40:29.100 --> 00:40:36.380 When the caps returned in 1772, however, the powerful merchant capitalists of the Hat Party 353 00:40:36.380 --> 00:40:43.300 collaborated with the Crown and the nobility to seize power in a coup d'etat, overthrowing 354 00:40:43.300 --> 00:40:57.300 King Gustav III as absolute monarch. King Gustav returned Sweden to the silver standard in 1777 at the existing market price. 355 00:40:57.300 --> 00:41:05.300 Later, British bullionist views spread to more intellectually accessible parts of the continent. 356 00:41:05.300 --> 00:41:15.700 Thus in 1816, Johann Georg Busch, 1728-1800, a mathematics teacher at the Hamburg Gymnasium, 357 00:41:15.700 --> 00:41:21.940 economist and founder of the Academy of Commerce at Hamburg, denounced inflationary banking 358 00:41:21.940 --> 00:41:24.600 propelled by government. 359 00:41:24.600 --> 00:41:30.800 Busch noted that as a result, the customary abuse has been that too many paper symbols 360 00:41:30.800 --> 00:41:35.380 have been produced measured against the needs of the citizens. 361 00:41:35.380 --> 00:41:40.640 As a consequence, there are too many who want to change back their paper money into the 362 00:41:40.640 --> 00:41:46.160 commodity which is and can be the true symbol of value. 363 00:41:46.160 --> 00:41:52.560 Since the bank cannot produce this commodity, gold or silver, out of nature, like the paper 364 00:41:52.560 --> 00:41:58.600 with letters and figures on it, and since she must then confess that she cannot fulfill 365 00:41:58.600 --> 00:42:08.600 In order to fulfill her promise to convert to specie, the deceived citizen must become reluctant to take one, the paper for the other, specie money. 366 00:42:09.600 --> 00:42:19.600 Bush identified the financing of war as the main reason for the emergency of governmental bank credit inflation since the beginning of the 18th century. 367 00:42:19.600 --> 00:42:29.600 Meanwhile, in Russia, the Baltic-German professor of political economy, the Smithian Heinrich Friedrich Freiherr von Storch, 368 00:42:29.600 --> 00:42:41.600 denounced government instigation of bank credit and paper money in a lengthy monetary appendix to the 1823 edition of his Cours d'économie politique. 369 00:42:41.600 --> 00:42:50.440 Storch, like Busch, zeroed in on war as the main reason for continuing inflation. 370 00:42:50.440 --> 00:42:55.880 The principal motive for introducing this calamitous invention of paper money in nearly 371 00:42:55.880 --> 00:43:02.120 all states of Europe have been the financial disorders caused by wars, which have been 372 00:43:02.120 --> 00:43:06.680 sometimes just and necessary but mostly useless. 373 00:43:06.680 --> 00:43:11.880 How many wars could have been prevented without this unhappy expedient? 374 00:43:11.880 --> 00:43:17.120 How many tears and how much blood could have been saved? 375 00:43:17.120 --> 00:43:25.240 The best remedy for this evil, declared Storch, would be a return to a pure 100% gold or silver 376 00:43:25.240 --> 00:43:28.400 standard in all nations. 377 00:43:28.400 --> 00:43:34.560 Failing that, however, Storch was willing to settle for free private competing banks, 378 00:43:34.560 --> 00:43:42.560 which he was perhaps the first to point out would be much less inflationary than governmentally privileged banking. 379 00:43:42.560 --> 00:43:50.560 As Storch put it, private banks are those presenting most advantages and least dangers. 380 00:43:50.560 --> 00:43:55.560 Great Britain is the only country in Europe where private banks exist. 381 00:43:55.560 --> 00:44:00.560 In all other states, banking business is concentrated in one institution, 382 00:44:00.560 --> 00:44:05.560 If not founded, then at least approved and privileged by government. 383 00:44:05.560 --> 00:44:11.560 Nevertheless, public banks are much more prone to degenerate than our private banks. 384 00:44:11.560 --> 00:44:18.560 As long as banking companies exist in isolation, their operations seem to be insignificant. 385 00:44:18.560 --> 00:44:25.560 As soon as they form one sole and great institution, they excite the attention of the government, 386 00:44:25.560 --> 00:44:32.100 are profits being more considerable, and because of this, the special protection they enjoy, 387 00:44:32.100 --> 00:44:37.280 or the privileges which they solicit, have to be bought by favors which change their 388 00:44:37.280 --> 00:44:40.440 nature and subtly undermine their credit.