Creature From Jekyll Island by G. Edward

In 1818, the Bank suddenly began to tighten its requirements for new loans and to call in as many of the old loans as possible.

This contraction of the money supply was justified to the public then exactly as it is justified today. It was necessary, they said, to put the brakes on inflation. The fact that this was the same inflation the Bank had helped to create in the first place, seems to have gone unnoticed.

There is no doubt that many bankers and politicians act in good faith in their attempt to bring under control the inflation they themselves have caused. Not everyone who benefits from the central-bank mechanism fully understands it. Like Frankenstein, they create a monster without realizing they cannot control it. Their crime is one of stupidity, not malice. But stupidity is not a characteristic of the average banker, especially a central banker, and we must conclude that many of the monetary scientists are well aware of the monster's power for destruction. At best, they just don't care as long as they are safe. And at worst, they perceive that they are in the apple-harvesting business. They deliberately tease and prod the monster in anticipation of his rampage through the village orchards. In the final analysis, of course, it is of little importance whether the shaking of the trees is out of innocence or malice. The end result is the same. My, how the apples do fall.

The country's first experience with a deliberately created monetary contraction began in 1818 when the Bank became concerned about its own ability to survive. Professor Rothbard says: Starting in July 1818, the government and the BUS [Bank of the United States] began to see what dire straits they were in; the A DEN OF VIPERS

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enormous inflation of money and credit, aggravated by the massive fraud, had put the BUS in danger of going under and illegally failing to maintain specie payments. Over the next year, the BUS began a series of enormous contractions, forced curtailment of loans, contractions of credit in the south and west.... The contraction of money and credit swiftly brought to the United States its first widespread economic and financial depression. The first nationwide

'boom-bust' cycle had arrived in the United States....

The result of this contraction was a rash of defaults, bankruptcies of business and manufacturers, and a liquidation of unsound investments during the boom.1

THE CYCLE IS WORSENED BY GOVERNMENT

INTERFERENCE

It is widely believed that panics, boom-bust cycles, and depressions are caused by unbridled competition between banks; thus the need for government regulation. The truth is just the opposite.

These disruptions in the free market are the result of government prevention of competition by the granting of monopolistic power to a central bank. In the absence of a monopoly, individual banks may operate in a fraudulent manner only to a limited extent and for a short period of time. Inevitably, they will be exposed by their more honest competitors and will be forced out of business. Yes, their depositors will be injured by the bankruptcy, but the damage will be limited to a relatively few and will occur only now and then.

Even geographical regions may be hard hit on occasion, but it will not be a national tragedy with everyone brought to their knees. The overall economy will absorb the losses, and commerce at large will continue to prosper. Within an environment of prosperity, even those who have been injured by fraudulent banking would have a good chance for rapid recovery. But, when a central bank is allowed to protect the fraudulent operators and to force all banks to function the same, the forces of competition can no longer dampen the effect. The expansion becomes universal and gigantic. And, of course, so does the contraction. Except for the bankers and the politicians, everyone is injured at the same time; depression is everywhere; and recovery is long delayed.

This is exactly what happened in the so-called panic of 1819. In the Documentary History of Banking and Currency, Herman Krooss writes:

1. Rothbard, Mystery, pp. 204-05. Also see Galbraith, p. 77.

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The Bank, as the largest creditor [to the state banks], had two alternatives: it could write off its debts which of course would wipe out the stockholders' equity and result in bankruptcy, or it could force the state banks to meet their obligations which would mean wholesale bankruptcy among state banks. There was no doubt about the choice The pressure placed upon state banks deflated the economy drastically, and as the money supply wilted, the country sank into severe depression.1

As historian William Gouge observed: 'The Bank was saved, and the people were ruined.'2

Competition between the national Bank and the state banks during this period had been moved from the open field of the free market to the closed arena of politics. Free-market competition had been replaced by government favoritism in the form of charters which granted the right of monopoly. A federal charter was clearly better than one issued by a state, but the states fought back fiercely with what weapons they possessed, and one of those was the power to tax. Several states began to levy a tax on the paper notes issued by any bank doing business within their borders which was not also locally chartered. The intent, although pretended to be the raising of state revenue, was really to put the federal Bank out of business.

THE SUPREME COURT UPHOLDS THE BANK

When the Bank refused to pay such a tax to the state of

Maryland, the issue was taken to the Supreme Court in 1819 as the celebrated case of McCulloch v. Maryland. The Chief Justice at that time was John Marshall, a leading Federalist and advocate of a strong, centralized federal government. As was expected, the Marshall Court carefully tailored its decision to support the federal government's central bank.

The narrow issue upon which the constitutionality of the Bank was decided was not whether Congress had the power to directly or indirectly emit bills of credit or otherwise convert debt into money. If that had been the issue, the Court would have been hard pressed to uphold the Bank, for that not only is expressly prohibited by the Constitution, it is precisely what the Bank had been 1. Krooss, pp. 190- 91.

2. William M. Gouge, A Short History of Paper Motley and Banking in the United States (New York: Augustus M. Kelly, 1968), p. 110.