Creature From Jekyll Island by G. Edward

cash.

My zeal against those institutions was so warm and open at the establishment of the bank of the U.S. that I was derided as a Maniac by the tribe of bank-mongers, who were seeking to filch from the public their swindling and barren gains.... Shall we build an altar to the old paper money of the revolution, which ruined individuals but saved the republic, and burn on that all the bank charters present and future, 342

THE CREATURE FROM JEKYLL ISLAND

and their notes with them? For these are to ruin both republic and individuals. This cannot be done. The Mania is too strong. It has seized by its delusions and corruptions all the members of our governments general, special, and individual.1

Jefferson was right. Congress had neither the wisdom nor the courage to let the free market clean up the mess that remained after the demise of the first bank of the U.S. If it had, the fraud soon would have become understood by the public, the dishonest banks would have folded, the losses would have been taken, and the suffering would have been ended, perhaps forever. Instead, Congress moved to protect the banks, to organize the fraud, and to perpetuate the losses. All of this was accomplished in 1816 when a twenty-year charter was given to the Second Bank of the United States.

THE SECOND BANK OF THE UNITED STATES

In every respect the new bank was a carbon copy of the old, with one minor exception. Congress unashamedly extracted from the private investors what amounted to nothing less than a bribe in the form of $1.5 million 'in consideration of the exclusive privileges and benefits conferred by this Act.'2 The bankers were glad to pay the fee, not only because it was a modest price for such a profitable enterprise, but also because, as before, they received an immediate government deposit of one-fifth the total capitalization which then was used as the base for manufacturing much of the remaining startup capital. The charter required the Bank to raise a minimum of $7 million in specie, but even in its second year of operation, its specie never rose above $2.5 million.3 Once again, the monetary and political scientists had carved out their profitable niches, and the gullible taxpayer, his head filled with sweet visions of 'banking reform,' was left to pick up the tab.

Another important continuity between the old and the new

Bank was the concentration of foreign investment. In fact, the largest single block of stock in the new Bank, about one-third in all, was held by this group. It is certainly no exaggeration to say that 1. Lester J. Cappon, ed., The Adams-Jefferson Letters (New York: Simon and Schuster, 1971), Vol. II, p. 424.

2. Act of 1816, Section 20,3 Stat, at 191.

3. Rothbard, Mystery, p. 203.

4. Krooss, p. 25.

A DEN OF VIPERS 343

^e Second Bank of the United States was rooted as deeply in Britain as it was in America.

The nation's third central bank ran into deep trouble from the start. It had promised to continue the tradition of moderating the other banks by refusing to accept any of their notes unless they were redeemable in specie on demand. But when the other banks returned the gesture and required that the new Bank also pay out specie on their demand, it frequently lost its resolve. There was also the tiny matter of corruption. As the Bank's major historian writes:

'So many influential people were interested [in the state banks] as stockholders that it was not advisable to give offense by demanding payment in specie, and borrowers were anxious to keep the banks in the humor to lend.'1

In economics, every policy carries a consequence, and the consequence of the loose monetary policy of the Second Bank of the United States was that America was introduced to her first experience with what now is called the 'boom-bust' cycle. Galbraith tells us: 'In 1816, the postwar boom was full on; there was especially active speculation in western lands. The new Bank joyously participated.

The Bank had the advantage over its competitors of a federal charter plus the government's agreement to accept its notes in the payment of taxes. But the state banks were by no means left out of the game. It was still within their power to create money through fractional-reserve banking and, thus, to further inflate the amount of the nation's circulating currency. Anxious to get in on this action, Pennsylvania chartered thirty-seven new banks in 1817. That same year, Kentucky followed suit with forty new charters. The total number of banks grew by 46% in just the first two years after the central bank was created. Any spot along the road that had 'a church, a tavern, or a blacksmith shop was deemed a suitable place for setting up a bank.'3 In that same time frame, the money supply was expanded by an additional $27.4 million; another taxpayer fleecing of over forty per cent.

1- Ralph C.H. Catterall, The Second Bankofthe United States (Chicago: University of Chicago Press, 1902), p. 36.

2. Galbraith, p. 77.

3. Norman Angell, The Story of Money (New York: Frederick A. Stokes Co., 1929), p. 279.

— 1

344 THE CREATURE FROM JEKYLL ISLAND

THE FIRST BOOM-BUST CYCLE

In the past, the effect of this inflationary process always had been the gradual evaporation of purchasing power and the continuous transfer of property from those who produced it to those who controlled the government and ran the banks. This time, however, the process took on a new twist. Gradualism was

replaced by catastrophism. The monetary scientists, with their hands firmly on the controls of the money machine, now began to throw the levers, first one way, and then the other. The expansion and then deliberate contraction of the money supply literally threw the nation into economic convulsions. Why wait for the apples to fall when the harvest can be hastened simply by shaking the tree?