Creature From Jekyll Island by G. Edward

Then, using this as a fractional-reserve base, he simply created the money that was needed for the subscription and loaned it to himself and his associates. Such is the power of the secret science.

It is hard to reconcile the fact that the same men who adopted the brilliant monetary restraints of the Constitution a few years later would have allowed the Bank of North America to exist. It must be remembered, however, that the war was still in progress 1. See Murray N. Rothbard, Conceived in Liberty: The Revolutionary War, 1775-1784

(New Rochelle, New York: Arlington House, 1979), Vol. IV, p. 392.

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when the charter was issued, and even the wisest of statesmen are often obliged to follow expediency in such times. One also must conclude that, while the founding fathers were wise on the nature of fiat money created by the government's printing press, they had not yet had extensive experience with the same mechanism hidden behind the obscurities of fractional-reserve banking.

In any event, the Bank was not to have its charter renewed by Congress and it did not survive beyond the end of the war. Murray Rothbard details its demise:

Despite the monopoly privileges conferred upon the Bank of North America and its nominal redeemability in specie, the market's lack of confidence in the inflated notes led to their depreciation outside the Bank's home base in Philadelphia. The Bank even tried to bolster the value of its notes by hiring people to urge redeemers of its notes not to insist on specie—a move scarcely calculated to improve the long-run confidence in the Bank.

After a year of operation, Morris's political power slipped, and he moved quickly to shift the Bank of North America from a central bank to a purely commercial bank chartered by the state of Pennsylvania. By the end of 1783,... the first experiment with a central bank in the United States had ended.1

A fitting epilogue to this story was written two hundred years later when, in 1980, the First Pennsylvania Bank of Philadelphia, the 'oldest bank in the nation,' was bailed out by the FDIC.

AN END RUN AROUND THE CONSTITUTION

It will be recalled that, after the Bank of North America was terminated and after the Constitutional Convention 'closed the door on paper money,' the United States enjoyed a period of unparalleled economic growth and prosperity. But, while the door may have been closed, the window was still open. Congress was denied the power to print money, but it was not denied the power to borrow it.

In the vocabulary of the common man, to borrow is to accept a loan of something that already exists. He is confused, therefore, when the banker issues money out of nothing and then says he is lending it. He appears to be lending but, in reality, he is creating.

Then, as now, the mysteries of banking vocabulary were not revealed to the average man, and it was difficult to understand 1- Rothbard, Mystery, pp. 194-95.

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how privately-issued bank notes could serve precisely the same purpose as printing-press money—with precisely the same disastrous results. That being the case, the monetary and political scientists decided to end run the Constitution. Their plan was to establish a bank, to give that bank the power to create money, to lend most of that money to the government, and then to make sure the IOUs are accepted as money by the public. Congress, therefore, would not be emitting bills of credit. The bank would do that.

Thus, the First Bank of the United States was conceived.

The proposal was submitted to Congress in 1790 by Alexander Hamilton who, at that time, was Secretary of the Treasury.

Hamilton, incidentally, was a former aide to Robert Morris, founder of the Bank of North America, so in that sense his role in this matter is not surprising. What is surprising is the fact that Hamilton had been a staunch supporter of a sound currency during the Constitutional Convention. This is hard to reconcile, and one must suspect that, even the most well intentioned of men can become corrupted by the temptations of wealth and power. It is possible that Hamilton, Morris, and other Federalist leaders had hoped to keep the government out of the money- making business, not because it was the constitutional thing to do, but because that would leave the field clear for a central-bank mechanism which, because it was further from public view and political control, could become their own private engine of profit. It would appear that the only other explanation is that these men were fickle in their views and did not really understand the implications of their acts. In view of their brilliance in all other matters, however, it is difficult to muster enthusiasm for that interpretation.

THE HAMILTON-JEFFERSON CONFLICT

Hamilton's proposal was strongly opposed by Thomas

Jefferson, then Secretary of State, and this was the beginning of a heated political debate that would preoccupy Congress for many decades to come. In fact, it was one of the central issues that led to the creation of our first political parties. The Federalists gathered around the ideas of Hamilton. The anti-Federalists, later called the Republicans, were attracted to the ideas of Jefferson.1

1. Curiously, the present Democratic Party traces its origin to Jefferson's Republicans.

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Jefferson pointed out that the Constitution did not grant to Congress the power to create a bank or anything similar. That means such power is reserved to the states or to the people. In a rebuttal to Hamilton's proposal, he said: 'To take a single step beyond the boundaries thus specially drawn around the powers of Congress,