Ron Paul, Thomas Jefferson, and Andrew Jackson versus the Fed

mod (Andy) note: This post went up earlier this week but was accidentally deleted, along with its comments, so I am reposting.

Ron Paul isn’t going to be President of the United States (all together
now; heavy sigh). You know it, I know it, and he knows it. But none of us
knows that some other inheritor of the political and economic tradition of
personal freedom and constitutionally limited government that Ron is trying
to rejuvenate won’t.

Those principles animated most of the American Founders, and just their
partial adoption into law and government in Britain, America, and (later)
Europe in the 18th and 19th centuries resulted in an explosion of human
entrepreneurship, inventiveness, innovation and productivity. As a result,
95 percent of the improvement in the material welfare of ordinary persons
in all of known human history has occurred in just the last 250 years.

Despite this miracle, a reaction against those classical liberal ideas and
institutions grew almost as soon as the founding generation was dead. Our
government was transformed.

Classical liberal views seem strange to most people nowadays, having
been replaced with those of progressive interventionism. As we approach
the financial dead end of welfare states everywhere, though, some people
are looking for alternatives.

Consider Ron Paul’s rants against the Federal Reserve, which seem to
be gaining some public traction, if not yet among the political class. Ron
stands on the shoulders of some intellectual giants, including F. A. Hayek
and Milton Friedman (“Move over a bit, Ron, you’re straining my clavicle.

And stop saying the Fed prints money. That isn’t how it works.”), both of
whom considered eliminating the Fed. But how many people know that
the Fed is the fourth central bank established in this country, and that we
abolished the first three?

The first American central bank was the Bank of North America,
established by the congress of the confederation in 1782 (the law actually
elevated the existing Bank of Pennsylvania to central bank status). This
was at the urging of Alexander Hamilton and Robert Morris, who was
superintendent of Finance. Checkered souls, those two, who sometimes
did great things, but were also corrupt financial manipulators and power
brokers.

The bank operated primarily in three states. Morris got large loans in gold
coin from the Netherlands and France and deposited them as reserves
against which to issue notes. Under the law, the bank’s notes were legally
privileged as acceptable in state tax payments. No competing bank was
allowed.

Most of the bank’s loans went to the Confederation government (which
had no power to tax) and to Morris and Hamilton’s acolytes. The bank
over-issued, and its notes depreciated. In response to its corruption,
Pennsylvania repealed the bank’s charter in 1785.

Following ratification of the Constitution in 1788, Hamilton formed the
Federalist Party. It was a mercantile party, favoring high tariffs, excise
taxes, a large national debt, central banking, and federal subsidies
for ‘internal improvements’.

Jefferson and Madison were shocked. Knowing that the revolution had
been fought and the constitution framed precisely in rejection of such
policies, and having read Adam Smith, they began organizing their own
party, the Democratic Republicans.

In 1791, with the Federalists in power and Hamilton as Secretary of State,
Congress chartered the First Bank of the United States, ostensibly to be
the federal government’s banker. And certainly to benefit the Hamiltonian
Federalists who would run the bank and own its stock. Jeffersonian
opposition was stiff, however. The bank was chartered for only twenty
years.

During the Adams administration the public was so offended by Federalist
policies that Jefferson became President in 1801. In 1811, with Madison
as President, Federalists efforts to recharter the First Bank were blocked,
and it died.

In 1816, however, attitudes in congress shifted and it created the Second
Bank of the United States. The bank had enormous special privileges,
being the sole depository for federal tax revenue, having control over
foreign exchange, immunity from federal regulation, and power to make
loans on special terms to its supporters. Excessive note issuance to
finance land sales doubled and tripled land prices, resulting in the Panic of
1819.

In 1829 Andrew Jackson became President. The great democrat created
the Democratic Party, paid off the national debt entirely, and established
the convention system for choosing presidential candidates. His partisans
extended state electoral franchises to include urban workers.

Jacksonian Democrats everywhere conducted a merciless war on all forms
of governmentally granted monopoly privilege that lasted for over 60 years.
In that time the Democratic Party was a self-consciously libertarian party,
standing for open entry, limited government and equality in the law.

The privileged monopoly Jackson most hated was the Second Bank. As its
charter approached termination, Jackson vetoed the re-charter bill. Then
he began withdrawing federal deposits from the bank, a crushing blow.
The bank’s Whig Party supporters could not override the veto.

From 1836 all the way to 1913, when the Federal Reserve was created,
America had no central bank. Yet it was precisely in this period that it
became, simultaneously, both the greatest agricultural and industrial nation
on earth.

Douglas North, the great economic historian, estimates that the compound
annual rate of growth in real output and income per person in America was
1 percent from the adoption of the constitution until 1840. It jumped up to
about 1.6 percent after that.

North also says that the period from the end of the Civil War to World War
I was the longest period of sustained, rapid economic growth in our history.
He doesn’t note that this occurred without a central bank.

So Ron Paul’s advocacy of abolishing the Fed should not be thought
outlandish. A lot of outstanding Americans, past and present, stand with
him. We have a long tradition of abolishing such monopolistic instruments
of financial manipulation. And the movement is growing.

Live in fear Chairman Ben. We’re coming for you.

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