This is the fifth installment of the book club discussion of Rothbard's Money and Banking in the United States. So far we have covered the book through THE UNITED STATES: BIMETALLIC COINAGE in part 1:
![History of Money in the United States [HOMIUS] - 1.4](https://substackcdn.com/image/fetch/$s_!N-HG!,w_140,h_140,c_fill,f_webp,q_auto:good,fl_progressive:steep,g_auto/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Fc151e3ff-cbde-4ce8-9247-0b13c7031516_532x837.jpeg)
As usual, will quote directly the passages I found especially interesting, including my takes here and there. The emphasis is always mine, unless stated otherwise.
THE FIRST BANK OF THE UNITED STATES: 1791–1811
A linchpin of the Hamiltonian financial program was a central bank, the First Bank of the United States, replacing the abortive Bank of North America experiment. Hamilton’s “Report on a National Bank” of December 1790 urged such a bank, to be owned privately with the government owning one-fifth of the shares. Hamilton argued that the alleged “scarcity” of specie currency needed to be overcome by infusions of paper and the new bank was to issue such paper, to be invested in the assumed federal debt and in subsidy to manufacturers.
The notes would be backed by specie and be redeemable in it on demand. The government would accept the notes for taxes, making them de-facto legal tender. The bank would be the depository for the federal public funds.
In February 1791 Congress established the First Bank of the United States along those lines with a national charter for 20 years. No other bank was to be allowed national charter during that period. Thomas Willing of Philadelphia became the president of the Bank. Willing had been president of Bank of North America, and a former partner of Robert Morris.
Lending money to the government is the mainstay of central banks operations. Money is created out of thin air (or almost out of thin air - depending on reserve requirements) and lent to the government at interest. The government uses its power of taxation to repay the debt.
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 $2 million in specie. The Bank of the United States invested heavily in loans to the United States government. In addition to $2 million invested in the assumption of pre-existing long-term debt assumed by the new federal government, the Bank of the United States engaged in massive temporary lending to the government, which reached $6.2 million by 1796.
The result was price inflation, with wholesale prices rising 72% from 1791 to 1796. Speculative assets, such as government securities and real estate, went up. In addition, the monetary expansion facilitated by the Bank of the United States led to creation of 18 new commercial banks between 1791 and 1796, while only four had existed before that time. Those banks only added to the monetary expansion. [Commercial bank’s main business activity is to loan to other businesses. Other widespread types of banks are retail banks and investment banks.]
The establishment of the Bank of the United States precipitated a grave constitutional argument, the Jeffersonians arguing that the Constitution gave the federal government no power to establish a bank. Hamilton, in turn, paved the way for virtually unlimited expansion of federal power by maintaining that the Constitution “implied” a grant of power for carrying out vague national goals. The Hamiltonian interpretation won out officially in the decision of Supreme Court Justice John Marshall in McCulloch v. Maryland (1819)
While the Jeffersonian Republicans (who later became known as Democratic-Republicans) were against commercial and central banks, when they came to power under Jefferson in 1801 they did not move to repeal the charter of the Bank of the United States before it ended in 1811. Not only that, but while they were in power there was a proliferation of banks and bank credit:
Thus, in 1800 there were 28 state banks; by 1811, the number had escalated to 117, a fourfold increase. In 1804, there were 64 state banks, of which we have data on 13, or 20 percent of the banks. These reporting banks had $0.98 million in specie, as against notes and demand deposits outstanding of $2.82 million, a reserve ratio of 0.35 (or, a notes plus deposits pyramiding on top of specie of 2.88-to-1). By 1811, 26 percent of the 117 banks reported a total of $2.57 million; but the two-and-a-half-fold increase in specie was more than matched by an emission of $10.95 million of notes and deposits, a nearly fourfold increase. This constituted a pyramiding of 4.26-to-1 on top of specie, or a reserve ratio of these banks of 0.23.
The Bank of the United States itself in January 1811 had specie assets of $5.01 million, with notes and deposits of $12.87 million: a ratio of 2.57-to-1, (corresponding to the reserve ratio of 0.39).
In 1811 the Bank's charter was to expire under President Madison - a Jeffersonian Republican, who fought for rechartering the Bank. He was aided by the almost all Federalists in Congress, but opposed by most Democratic-Republicans. In the end the recharter bill was defeated by only one vote in each Congressional chamber.
Rothbard end the section with the following observation as to who is interested in central banks and why:
In view of the widely held misconception among historians that central banks serve, and are looked upon, as restraints upon state or private bank inflation, it is instructive to note that the major forces in favor of recharter were merchants, chambers of commerce, and most of the state banks. Merchants found that the bank had expended credit at cheap rates and had eased the eternal complaint about a "scarcity of money." Even more suggestive is the support of the state banks, which hailed the bank as "advantageous" and worried about the contraction of credit if the bank were forced to liquidate. The Bank of New York, which had been founded by Alexander Hamilton, in fact lauded the Bank of the United States because it had been able “in case of any sudden pressure upon the merchants to step forward to their aid in a degree which the state institutions were unable to do."
Rothschilds Everywhere
There is an alternative plot to the story of the First Bank: in promoting the Bank Hamilton acted as a Rothschilds' agent. The latter were attempting (and eventually succeeded) to create a system of privately owned central banks via which they would be able to influence world governments.
I find that particular alternative plot rather unlikely. In 1790 the Rothschild family was in relatively early stages of its rise. The eldest Rothschild son was just 17 at the time. And Nathan Mayer Rothschild, the founder of the family's British branch, was only 13, and would not arrive in England until 1798.