The point is that the Bank of the United States was able to place considerable restraint upon the practices of all banks, both wildcat and urban. It did this simply by refusing to accept the notes of any other bank unless it had a reputation for redeeming those notes in specie on demand. The public reacted accordingly. If the notes 334 THE CREATURE FROM JEKYLL ISLAND
were not good enough for the Bank of the United States, they were not good enough for them either. This served as an indirect force of moderation that affected all banks of that time. And that, too, was good.
Some historians have said that the Bank was a positive force in yet another way. Galbraith, for example, writes admiringly: On occasion, the Bank of the United States came to the assistance of good state banks that were being besieged by their note holders or other creditors. So, besides enforcing restraint, it served also as the lender of last resort. Thus in its short span of life it went far to perceive and develop the basic regulatory functions of a central bank.1
One who is less enamored with the idea of a central bank
would be tempted to ask: If those state banks were so 'good,' why did they need assistance in keeping faith with their depositors? The whole idea of a 'lender of last resort,' which is accepted as sacred dogma today, is based on the assumption that it is perfectly acceptable for the entire banking system to be fraudulent. It is assumed that any single bank or cluster of banks could at any time become 'besieged by their note holders or other creditors.' Therefore, it is prudent to have a central bank to take what meager reserves there are within the system and rush them from bank to bank, if not minutes before the examiner arrives, at least before the customers do.
As for the much talked about restraint exercised over other banks, it is not unreasonable to think that this same effect would have developed even without the presence of a government bank.
If the free market had been left to operate, it is certain that, before long, one or more banks would gain a deserved reputation for honesty and full faith with their depositors. They would become the most popular banks and, therefore, the most prosperous. In order to accomplish this, however, they would
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believe that only politicians, bureaucrats, and agencies of government can act with integrity, a shaky notion at best.
AN INSTRUMENT OF PLUTOCRACY
In any event, there is no denying the fact that the Bank of the United States did provide some braking force to the runaway tendencies of many of the nation's private banks. So it could have been worse. The inflation that it caused by its own activities could have been enlarged even further by the activities of the other banks as well. But, that it could have been worse does not make it good.
As it was, the Bank was the means by which the American people lost forty-two per cent of the value of all the money they earned or possessed during just those five years. We must not forget, either, that this confiscation of property was
And it especially did not work against those elite few, the political and monetary scientists, who were making huge profits from the enterprise. The Bank had done precisely what Hamilton had advocated: '... unite the interest and credit of rich individuals with those of the state.'
The development of this plutocracy was well described by
Governeur Morris, the former delegate from New York who had helped to draft the Constitution into its final form. He had been an assistant to Robert Morris (not related) and was a champion of the concept of a natural aristocracy. So he knew his subject well when he warned:
The rich will strive to establish their dominion and enslave the rest. They always did. They always will.... They will have the same effect here as elsewhere, if we do not, by such a government, keep them within their proper spheres. We should remember that the people never act from reason alone. The rich will take advantage of their passions, and make these the instruments for oppressing them.
The result of the contest will be a violent aristocracy, or a more violent despotism.1
The tide of political pressure against the Bank was steadily rising during these years. It is tempting for critics of the central-bank mechanism to attribute that to the awakening common sense 1. Written on July 2, 1787, in a letter to James Madison. Quoted in 'Prosperity Economics,' by W. Cleon Skousen,
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of the American public. Unfortunately, the picture is not that pleasing. It is true that the Jeffersonian Republicans were eloquently holding forth against the Creature's progenitor, and their influence was substantial. But there was another group that joined with them which had almost exactly opposite ideas and goals. The Jeffersonians opposed the Bank because they believed it was unconstitutional and because they wanted a monetary system based only upon gold and silver coin. The other group was made up of the wildcatters, the land speculators, and the empire-building industrialists. They opposed the Bank because they wanted a monetary system with no restraints at all, not even those associated with fractional reserve. They wanted every local bank to be free to create as much paper money as the public would swallow, because they would then use that money for their own projects and profit.
Indeed, politics
As the time approached for renewal of the Bank's charter, the battle lines inched toward each other. They were of equal force. The halls of Congress echoed with the cannon roar of angry debate. The vote was deadlocked. Another attack and counter attack. Again a deadlock. Into the night the forces clashed.
When the smoke of battle lifted, the bill for charter renewal had been defeated by
