Creature From Jekyll Island by G. Edward

LOAVES AND FISHES AND CIVIL WAR

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The free banks were no less fraudulent than the chartered banks. The old custom was revived of rushing gold coins from one bank to another just ahead of the bank examiners, and of 'putting a ballast of lead, broken glass and (appropriately) ten-penny nails in the box under a thinner covering of gold coins.'1 When one such free bank collapsed in Massachusetts, it was discovered that its bank note circulation of $500,000 was backed by exactly $86.48.2

Professor Hans Sennholz writes:

Although economists disagree on many things, most see eye to eye on their acceptance of political control... These economists invariably point at American money and banking before the Civil War which, in their judgment, confirms their belief. In particular, they cite the 'Free Banking Era' of 1838-1860 as a frightening example of turbulent banking and, therefore, applaud the legislation that strengthened the role of government.

In reality, the instability experienced during the Free Banking Era was not caused by anything inherent in banking, but resulted from extensive political intervention.... 'Free banking' acts ... did not repeal burdensome statutory provisions and regulatory directives. In fact they added a few.3

For banking to have been truly free, the states would have had to do only two things: (1) enforce banking contracts the same as any other contract, and then (2) step out of the picture. By enforcing banking contracts, the executives of any bank which failed to redeem its currency in specie would have been sent to prison, an eventuality which soon would have put a halt to currency overis-sue. By stepping out of the picture and dropping the pretense of protecting the public with a barrage of rules, regulations, safety funds, and guarantees, people would have realized that it was their responsibility to be cautious and informed. But, instead, the banks continued to enjoy the special privilege of suspending payment without punishment, and the politicians clamored to convince the voters that they were taking care of everything.

In short, throughout this entire period of bank failures, economic chaos, and fleecing of both investors and taxpayers, America 1- Galbraith, p. 87.

2. Charles Beard, The Rise of American Civilization (New York: Macmillan, 1930), Vol. I, pp. 429-30.

3. 'Old Banking Myths,' by Hans F. Sennholz, The Freeman (Irvington-on-Hudson, New York), May, 1989, pp. 175-76.

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tried everything except full redemption by gold and silver. As the name of Andrew Jackson faded into history, so did the dream of honest banking.

Not all banks were corrupt, and certainly not all bankers were conspirators against the public. There were many examples of honest men striving to act in an ethical manner in the discharge of their fiduciary responsibilities. But they were severely hampered by the system within which they labored, a system which, as previously illustrated, punished prudence and rewarded recklessness. In balance, the prudent banker was pushed aside by the mainstream and became but a footnote to the history of that period.

INDUSTRIAL EXPANSION IN SPITE OF DISHONEST

BANKING

Another positive aspect to the picture is that it was during this same time that many business enterprises came into being and greatly prospered, albeit at the expense of those who had no desire to contribute. The great canals were dug, the railroads pushed back the frontier, boom towns sprang up along the way, prairies were turned into agricultural land, and new businesses followed in their wake. Much of this expansion was facilitated by a flood of fraudulent money created by the banks. Apologists for fractional-reserve banking have been prone to look at this development and conclude that, in net balance, it was a good thing. The fact that some people were cheated in order for others to prosper did not seem to be important. America just wouldn't have grown and prospered without funny money. Galbraith, for example, exudes: As civilization, or some approximation, came to an Indiana or Michigan crossroads in the 1830s or 1840s, so did a bank. Its notes, when used and loaned to a farmer to buy land, livestock, feed, seed, food or simple equipment, put him into business. If he and others prospered and paid off their loans, the bank survived. If he and others did not so prosper and pay, the bank failed, and someone—perhaps a local creditor, perhaps an eastern supplier—was left holding the worthless notes. But some borrowers from this bank were by now in business. Somewhere, someone holding the notes had made an involuntary contribution to the winning of the West.... The [banking]

anarchy served the frontier far better than a more orderly system that kept a tight hand on credit could have done.1

1. Galbraith, p. 85.

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William Greider continues this rationale:

'Reckless, booming anarchy,' in short, produced fundamental progress. It was not a stable system, racked as it was with bank failures and collapsed business ventures, outrageous speculation and defaulted loans. Yet it was also energetic and inventive, creating permanent economic growth that endured after the froth had blown away.

This, of course, is a classic example of the failure of liberal economics. When evaluating a policy, it focuses only on one beneficial consequence for one group of people and ignores the multitude of harmful effects which befall all other groups. Yes, if we look only at the frontiersmen who acquired new ranches and established new business, the fractional-reserve system looks pretty good. But, if we add in to the equation all the financial losses to all of the people who were victimized by the system—what Galbraith calls 'an involuntary contribution' and what Greider lightly dismisses as 'froth'—then the product is zero at best and, in terms of morality, is deeply in the negative.

Galbraith, Greider, and other popular economists assume that the West could not possibly have been won with honest banking.

Logic does not support such a conclusion. There is every reason to believe that the bank failures and the resulting business failures on the frontier all but canceled out the gains that were made by hard work and honest industry. Had these destructive convulsions been absent, as most of them would have been under a less chaotic system, there likely would have been fewer business starts, but a greater number would have finished,