Chapter Sixteen: The Creature Comes to America

The story of the Bank of North America, the nation’s first central bank, which was formed even before the Constitution was drafted; the story of the First Bank of the United States, the nation’s second central bank, which was formed in 1791; the massive inflation caused by both banks; the causes of their demise.

It is a surprising fact that the United States had its first central bank even before the Constitution was drafted. It was chartered by the Continental Congress in the Spring of 1781 and opened its doors the following year. There were great expectations at that time that the province of Canada would soon join the rebel colonies to form a union extending across the entire North American continent. In anticipation of that, the new financial institution was called the Bank of North America.

The Bank was organized by Robert Morris, a member of Congress, who was a leader of a group of politicians and merchants who wanted the new nation to imitate the mercantilism of England. They wanted high taxes to support a powerful, centralized government, high tariffs to subsidize domestic industry, a large army and navy, and the acquisition of colonial outposts to expand into foreign lands and markets. He was a wealthy Philadelphia merchant who had profited greatly from war contracts during the Revolution. He had carefully studied the secret science of money and, by 1781, was widely considered to be the financial wizard of Congress. The Bank of North America was modeled closely after the Bank of England. Following the practice of fractional reserve, it was allowed to issue paper promissory notes in excess of actual deposits, but, since some gold and silver had to be held in the vault, there were definite limits to how far that process could go. Bank notes were not forced on the people as legal tender for all debts, public and private, but the government did agree to accept them at their face value in payment of all taxes and duties, which made them as good as gold for that specific purpose. Furthermore, unlike the central banks of today, the Bank of North America was not given the power to directly issue the nation’s money.

Functioned As A Central Bank

On the other hand, the Bank was given the right of monopoly in its field, which means there were no other bank notes allowed to circulate in competition. This, plus the fact that they were accepted at face value in payment of all federal and state taxes, plus the further fact that the federal government did not at that time have a functioning money of its own, made these bank notes attractive for use as a circulating medium of exchange. The intended result was that the Bank’s paper would be accepted as money, which for a while, it was. Furthermore, the Bank was made the official depository for all federal funds and it almost immediately loaned $1.2 million to the government, much of which was created out of nothing for that purpose. So, in spite of the limitations placed upon the Bank, and in spite of the fact that it was essentially a private institution, it was intended to be and, in fact, did function as a central bank.

The Bank of North America was fraudulent from the very start. The charter required that private investors provide $400,000 for the initial subscription. When Morris was unable to raise that money, he used his political influence to make up the shortfall out of government funds. In a maneuver that was nothing less than legalized embezzlement, he took the gold that had been loaned to the United States from France and had it deposited in the Bank. Then, using this as a fractional-reserve base, he simply created the money that was needed for the subscription and loaned it to himself and his associates. Such is the power of the secret science.

It is hard to reconcile the fact that the same men who adopted the brilliant monetary restraints of the Constitution a few years later would have allowed the Bank of North America to exist. It must be remembered, however, that the war was still in progress when the charter was issued, and even the wisest of statesmen are often obliged to follow expediency in such times. One also must conclude that, while the founding fathers were wise on the nature of fiat money created by the government’s printing press, they had not yet had extensive experience with the same mechanism hidden behind the obscurities of fractional-reserve banking.

In any event, the Bank was not to have its charter renewed by Congress and it did not survive beyond the end of the war. Murray Rothbard details its demise:

Despite the monopoly privileges conferred upon the Bank of North America and its nominal redeemability in specie, the market’s lack of confidence in the inflated notes led to their depreciation outside the Bank’s home base in Philadelphia. The Bank even tried to bolster the value of its notes by hiring people to urge redeemers of its notes not to insist on specie — a move scarcely calculated to improve the long-run confidence in the Bank.

After a year of operation, Morris’s political power slipped, and he moved quickly to shift the Bank of North America from a central bank to a purely commercial bank chartered by the state of Pennsylvania. By the end of 1783,… the first experiment with a central bank in the United States had ended.

A fitting epilogue to this story was written two hundred years later when, in 1980, the First Pennsylvania Bank of Philadelphia, the oldest bank in the nation, was bailed out by the FDIC.

An End Run Around The Constitution

It will be recalled that, after the Bank of North America was tenninated and after the Constitutional Convention closed the door on paper money, the United States enjoyed a period of unparalleled economic growth and prosperity. But, while the door may have been closed, the window was still open. Congress was denied the power to print money, but it was not denied the power to borrow it.

In the vocabulary of the common man, to borrow is to accept a loan of something that already exists. He is confused, therefore, when the banker issues money out of nothing and then says he is lending it. He appears to be lending but, in reality, he is creating.

Then, as now, the mysteries of banking vocabulary were not revealed to the average man, and it was difficult to understand how privately-issued bank notes could serve precisely the same purpose as printing-press money — with precisely the same disastrous results. That being the case, the monetary and political scientists decided to end run the Constitution. Their plan was to establish a bank, to give that bank the power to create money, to lend most of that money to the government, and then to make sure the I.O.U.s are accepted as money by the public. Congress, therefore, would not be emitting bills of credit. The bank would do that. Thus, the First Bank of the United States was conceived. The proposal was submitted to Congress in 1790 by Alexander Hamilton who, at that time, was Secretary of the Treasury. Hamilton, incidentally, was a former aide to Robert Morris, founder of the Bank of North America, so in that sense his role in this matter is not surprising. What is surprising is the fact that Hamilton had been a staunch supporter of a sound currency during the Constitutional Convention. This is hard to reconcile, and one must suspect that, even the most well intentioned of men can become corrupted by the temptations of wealth and power. It is possible that Hamilton, Morris, and other Federalist leaders had hoped to keep the government out of the money-making business, not because it was the constitutional thing to do, but because that would leave the field clear for a central-bank mechanism which, because it was further from public view and political control, could become their own private engine of profit. It would appear that the only other explanation is that these men were fickle in their views and did not really understand the implications of their acts. In view of their brilliance in all other matters, however, it is difficult to muster enthusiasm for that interpretation.

The Hamilton-Jefferson Conflict

Hamilton’s proposal was strongly opposed by Thomas Jefferson, then Secretary of State, and this was the beginning of a heated political debate that would preoccupy Congress for many decades to come. In fact, it was one of the central issues that led to the creation of our first political parties. The Federalists gathered around the ideas of Hamilton. The anti-Federalists, later called the Republicans, were attracted to the ideas of Jefferson.

Jefferson pointed out that the Constitution did not grant to Congress the power to create a bank or anything similar. That means such power is reserved to the states or to the people. In a rebuttal to Hamilton’s proposal, he said: To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition. Furthermore, he said, even if the Constitution had granted such power, it would be an extremely unwise thing to do, because allowing banks to create money could only lead to national ruin.

Hamilton, on the other hand, argued that debt was a good thing, if kept within reason, and that the nation needed more money in circulation to keep up with expanding commerce. Only the Bank, he said, would be able to provide that. Furthermore, while it is true the Constitution did not specifically grant the power to create such a bank, it was, nevertheless, an implied power, because it was needed to accomplish other functions which were granted in the Constitution.

That was the end run.

Nothing could be more polarized than the opposing ideas of these two men:

JEFFERSON: A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army. We must not let our rulers load us with perpetual debt

HAMILTON: No society could succeed which did not unite the interest and credit of rich individuals with those of the state. A national debt, if it is not excessive, will be to us a national blessing.

America’s Second Central Bank Is Created

After a year of intense debate, Hamilton’s views prevailed and, in 1791, Congress granted a twenty-year charter to the Bank of the United States. It was modelled closely after the Bank of England, which means it was almost an exact replica of the previous Bank of North America. In fact, as evidence of continuity with the past, the president of the new bank was Thomas Willing, the same man who had been a partner of Robert Morris and president of the old bank.

As before, the new Bank was given a monopoly in the issuance of bank notes. Once again, these notes were not forced on the people as legal tender for private debts and contracts, but they were legal tender at face value for all debts to the government in the form of taxes and duties, which made them attractive for use as common money. And once again, the Bank was made the official depository of all federal funds.

The charter specified that the Bank was required at all times to redeem its notes in gold or silver specie upon demand by the depositor. That was an admirable provision but, since the Bank was not also required to keep specie in its vaults in the full amount of its note obligations, it was a mathematical impossibility to uphold.

As with the old Bank of North America, the new Bank of the United States was to have eighty percent of its capital provided by private investors with the federal government putting up only twenty percent. That was a mere bookkeeping sleight-of-hand, however, because it had been prearranged for the Bank to immediately loan back to the federal government exactly that same amount. Reminiscent of the Morris scheme in capitalizing the Bank of North America, this federal investment was essentially a means whereby federal funds could be used to make up the short-fall of the private investors. Call it by what name you please, said Jefferson, this was not a loan or an investment but an outright gift. And he was certainly right. The Bank was able to open its doors with less than nine percent of the private capital required by its charter. The total capitalization was specified at $10 million, which means that $8 million was to come from private stockholders. However, as John Kenneth Galbraith wryly observed: Numerous thrifty participants confined themselves to a modest down payment, and the bank began operations on around $675,000 in hard cash.

The Creature Comes from Europe

Who were these private investors? Their names do not appear in the published literature, but we can be certain they included the Congressmen and Senators — and their associates — who engineered the charter. But there is an interesting line in Galbraith’s text that hints at another dimension to the composition of this group. On page 72 of Money: Whence It Came, Where It Went, he states matter-of-factly: Foreigners could own shares but not vote them. What a story is hidden behind that innocuous statement. The blunt reality is that the Rothschild banking dynasty in Europe was the dominant force, both financially and politically, in the formation of the Bank of the United States. Biographer, Derek Wilson, explains:

Over the years since NJM [Rothschild], the Manchester textile manufacturer, had bought cotton from the Southern states, Rothschilds had developed heavy American commitments. Nathan … had made loans to various states of the Union, had been, for a time, the official European banker for the US government and was a pledged supporter of the Bank of the United States.

Gustavus Myers, in his History of the Great American Fortunes, is more pointed. He says:

Under the surface, the Rothschilds long had a powerful influence in dictating American financial laws. The law records show that they were the power in the old Bank of the United States.

The Rothschilds, therefore, were not merely investors nor just an important power. They were the power behind the Bank of the United States! The significance of the Rothschild power in American finance and politics was the subject of extensive comment in a previous section, so there is no need to cover that ground again. It is important here, however, to at least make a mental note of the fact that the Creature from Jekyll Island is descended from a species that is not native to this land.

Inflation All Over Again

From the beginning, the primary purpose of the Bank was to create money for the federal government. Money for the private sector was strictly secondary. That was made clear by the fact that the maximum rate of interest it was allowed to charge was six percent That made it impractical to make loans to anyone except the federal government and a few large, prime-rate borrowers. And the government wasted no time putting its new central-bank mechanism to work. Having invested $2 million at the start, it converted that into $8.2 million borrowed within the next five years. Which means that $6.2 million was created specifically for its use.

Anyone familiar with the history of money as outlined in the previous section could easily write the following paragraph.

The creation of millions of new fractional-reserve dollars, which the government pushed into the economy through spending programs, caused an imbalance between the supply of money and the supply of goods and services. Prices appeared to go up as the relative value of the dollar went down. In that same five-year period, wholesale prices rose by 72%, which is another way of saying that 42% of everything people had saved in the form of money was quietly confiscated by the government through the hidden tax called inflation.

The same inflation effect that previously had plagued the colonies now returned to plague the new generation. This time, instead of being caused by printing-press money, it was fractional-reserve money. The cog that linked the two mechanisms together and caused them to function as one was federal debt. It was federal debt that allowed the political and monetary scientists to violate the intent of the founding fathers, and it was this same federal debt that prompted Jefferson to exclaim:

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the general principle of the Constitution; I mean an additional article, taking from the federal government their power of borrowing.

Like so many things in the real world, the Bank of the United States was a mixture of evil with some good. It certainly was not all bad. In colonial times, the state governments printed as much paper money as they pleased, and the loss of purchasing power was, in many cases, total. The Bank, on the other hand, was required to maintain some gold and specie as a base for its pyramid of money. Even though it was an inverted pyramid with reserves being smaller than the quantity of bank notes, it still represented a boundary to just how far the money supply could be expanded. And that was good.

Furthermore, it is apparent that the bank’s directors were imbued with a certain amount of enlightened self interest in that they actually wanted to keep the creation of new money within some kind of control. They could profit from the central-bank mechanism only so long as the economy as a whole was productive enough to support it. They did not want to kill the goose that laid the golden egg. So, like their counterparts in the Federal Reserve System of our modern day, they spoke the language of restraint and, in a few instances, even acted with restraint as well.

Wildcat Banks

For example, it was during this period that wildcat banks began to flourish. They were given that name not because they were untamed — although that would have been another good reason to do so — but because they were located in areas so remote in the frontier that it was said their only customers were wildcats.

Wildcat banks were not noted for meticulous accounting or business practices. Like all banks at that time, they were required to keep a certain portion of their deposits on hand in the form of gold or silver coin. To engender public confidence in their faithfulness to that obligation, it was common practice to keep the vault door open so a keg or two of gold coins could be viewed during business hours — not altogether different from the modern practice of financial institutions advertising how many billions in assets they hold but never mentioning the size of their liabilities. The wildcatters, however, were not reluctant to sprinkle a few precious-metal coins over the top of nails and let that take care of public relations. In some cases, as state examiners went from bank to bank to check the reserves, the gold would arrive only a few minutes ahead of them, having been rushed from the vault of the bank previously audited.

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 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.

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 have to reject the worthless notes of other banks. The public would react as expected, and even the most unscrupulous banks would have to toe the line if they wanted to survive. Moderation would be forced on the entire banking system as a result of open competition within a free market. To assume that only a federally-chartered central bank could have brought moderation into the monetary system is to 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 percent 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 selective. It did not work against the wealthy classes which were able to ride the wave of inflation aboard the raft of tangible property which they owned. 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.

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 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 does produce strange bedfellows.

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 one vote in the House and one vote, cast by Vice-President George Clinton to break the tie, in the Senate. And so, on January 24, 1811, the Bank of the United States closed its doors.

The battle may have been decided, but the war was far from over. The losers, bitter with defeat, merely regrouped their forces and began to prepare for the next encounter. Unfortunately, the events that followed were ideally suited for their plans.

With the moderating effect of the Bank now removed from the scene, the nation’s banking system passed wholly into the hands of the state-chartered corporations, many of which were imbued with the wildcat mentality. Their numbers grew rapidly, and so did the money supply which they created. Inflation followed in their footsteps. Public dissatisfaction began to rise.

If the free market had been allowed to operate, it is likely that competition soon would have weeded out the wildcatters and restored balance to the system, but it was never given a chance. The War of 1812 saw to that.

The War of 1812

The War of 1812 was one of the most senseless wars in history. The primary cause, we are told, was the British impressment into their navy of American sailors on the high seas to assist in the war against Napoleonic France. But the French had done exactly the same thing to assist in the war against England, yet their acts were ignored. Furthermore, the British had already rescinded their policy regarding American seamen before the war was underway, which means that the cause of the war had been removed, and peace could have been restored in honor if Congress had so wanted. One must conclude that the pro-banking interests in the United States actually wanted the conflict because of the profits that could be realized from it. As evidence of this is the fact that the New England states, which were home to the seamen who had been impressed into service, were firmly against the war, while the Western and inland Southern states, which were home to the myriad of wildcat banks, howled loudly for a clash of arms.

In any event, the war was unpopular with the average citizen, and it was out of the question for Congress to obtain funding for armaments through an increase in taxes. So the government needed the state banks to create that money outside the tax structure and came to their rescue to protect them from the discipline of the free market. It was a classic case of the unholy alliance, the cabal, that always develops between political and monetary scientists. Professor Rothbard gives the details:

The U.S. government encouraged an enormous expansion in the number of banks and in bank notes and deposits to purchase the growing war debt. These new and recklessly inflationary banks in the Middle Atlantic, Southern, and Western states, printed enormous quantities of new notes to purchase government bonds. The federal government then used these notes to purchase arms and manufactured goods in New England …

By August 1814, it became clear that the banks of the nation apart from New England could not pay [in specie], that they were insolvent. Rather than allow the banks of the nation to fail, the governments, state and federal, decided in August 1814 to allow the banks to continue in business while refusing to redeem their obligations in specie. In other words, the banks were allowed to refuse to pay their solemn contractual obligations …

This general suspension was not only highly inflationary at the time; it set a precedent for all financial crises from then on. Whether the U.S. had a central bank or not, the banks were assured that if they inflated together and then got in trouble, government would bail them out.

The state banks had created enough instant money for the federal government to raise the debt from $45 million to $127 million, a staggering sum for the fledgling nation. Tripling the money supply, with no appreciable increase in goods, means the value of the dollar shrank to about one-third its former purchasing power. By 1814, when the depositors began to awake to the scam and demanded their gold instead of paper, the banks closed their doors and had to hire extra guards to protect officials and employees from the angry crowds. Once again, the monetary and political scientists had succeeded in fleecing the American public of approximately 66% of all the money they held during that period, and that was on top of the 42% fleecing they got a few years earlier by the Bank of the United States.

Juggling Tricks and Banking Dreams

Leaning against the storm of paper money all this time was Thomas Jefferson, by now, past-President of the United States. Trying to bring the nation to its senses, he never ceased speaking out against the evil of dishonest money and debt:

Although all the nations of Europe have tried and trodden every path of force and folly in a fruitless quest of the same object, yet we still expect to find in juggling tricks and banking dreams, that money can be made out of nothing, and in sufficient quantity to meet the expense of heavy war. …

The toleration of banks of paper discount costs the United States one-half of their war taxes; or, in other words, doubles the expenses of every war. …

The crisis, then, of the abuses of banking is arrived. The banks have pronounced their own sentence of death. Between two and three hundred millions of dollars of their promissory notes are in the hands of the people, for solid produce and property sold, and they [the banks] formally declare that they will not pay them … Paper was received on a belief that it was cash [gold], and such scenes are now to take place as will open the eyes of credulity and of insanity itself to the dangers of a paper medium abandoned to the discretion of avarice and of swindlers. …

It is a wise rule never to borrow a dollar without laying a tax at the same instant for paying the interest annually and the principal within a given term. … We shall consider ourselves unauthorized to saddle posterity with our debts, and morally bound to pay them ourselves. … The earth belongs to the living, not the dead … We may consider each generation as a distinct nation with a right to … bind themselves, but not the succeeding generation. …

The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.

And still, Congress did not listen.


America had its first central bank even before the Constitution was drafted. It was called the Bank of North America and was chartered by the Continental Congress in 1781. Modeled after the Bank of England, it was authorized to issue more paper promissory notes than it held in deposits. In the beginning, these notes were widely circulated and served as a national currency. Although the bank was essentially a private institution, it was designed for the purpose of creating money to lend to the federal government, which it did from the start.

The Bank of North America was riddled with fraud, and it quickly fell into political disfavor. Its inflated bank notes eventually were rejected by ordinary citizens and ceased to circulate outside of the Bank’s home city of Philadelphia. Its charter was allowed to expire and, in 1783, it was converted into a purely commercial bank chartered by the state of Pennsylvania.

The advocates of fiat money did not give up. In 1791, the First Bank of the United States (America’s second central bank) was created by Congress. The new bank was a replica of the first, including fraud. Private investors in the Bank were among the nation’s most wealthy and influential citizens, including some Congressmen and Senators. But the largest investment and the most powerful influence in the new Bank came from the Rothschilds in Europe.

The Bank set about immediately to serve its function of creating money for the government. This led to a massive inflation of the money supply and rising prices. In the first five years, 42% of everything people had saved in the form of money was confiscated through the hidden tax called inflation. This was the same phenomenon that had plagued the colonies less than two decades earlier, but instead of being caused by printing-press money, it was now fueled by fractional-reserve bank notes created by a central bank.

As the time for renewal of the Bank’s charter approached, two groups with opposite intentions became strange political allies against it: the Jeffersonians who wanted sound money; and the frontier banks, called wildcatters, who wanted unlimited license to steal. On January 24, 1811, the charter was defeated by one vote in the Senate and one in the House. The central bank was gone, but the wildcatters were everywhere.

The War of 1812 was not popular among the American public, and funding would have been impossible through taxes alone. The government chose to fund the war by encouraging wildcat banks to purchase its war-debt bonds and convert them into bank notes which the government then used to purchase war material. Within two years, the nation’s money supply had tripled, and so had prices. Once again, the monetary and political scientists had succeeded in fleecing the American public of approximately 66% of all the money they held during that period. And that was on top of the 42% fleecing they got a few years earlier by the Bank of the United States.