We Are Serfs

Good summation:

In 1913 Congress passed the Federal Reserve Act, establishing a central bank for the third time in American history. It had been almost 80 years since the charter for the Second Bank of the United States had been allowed to expire in 1836. The issues surrounding the establishment of the Fed were not new. The same issues had surrounded the establishment and termination of both previous central banks, especially the Second Bank of the United States.

The First Bank of the United States had been chartered in 1791, when little was known or understood about the inflationary effects of a central bank. The Jeffersonian Republicans prevailed in 1811 to thwart the renewal of its charter. But Federalist President James Madison's party chartered the Second Bank of the United States just five years later. The Republicans' worst predictions came true about the inflationary effects of the new bank and the regional animosities that would ensue.

The bank had been capitalized with only $2 million in specie (gold). At the end of its first year in operation, it had issued $43 million in notes. Even worse, it had allowed state-chartered banks to use its notes as reserves - that is, as if its notes were gold. The state banks then issued notes of their own supposedly back by "good as gold" federal notes but actually backed only fractionally by these federal notes, which themselves were backed only fractionally by gold. Proponents of the national bank had argued that the national bank's regulatory authority would restrain state banks from this practice, but the national bank soon became an even more profligate issuer of paper money not backed by specie. This pyramiding credit expansion caused wild speculation in Western lands, the 19th century equivalent of a stock market or housing bubble.

But the early founders of the country better understood the relationship between a nation's currency and government power. They knew that the United States would not remain a free country if the government were allowed to control the currency. Republican (the forerunner of today's Democratic Party) President Andrew Jackson led a heroic battle against the Federalists to kill the bank, citing as his main argument that a central bank would destroy our hard-won freedoms from centralized government, the only real threat to American liberty. So, in 1832 President Jackson vetoed a bill to extend the bank's charter. When the charter expired in 1836, Mr. Jackson killed the inflationary land boom by passing the Species Circular, which stipulated that Western land sales must be paid for in specie. It would be 80 years until the next central bank act. In the meantime, the U.S. prospered as no country on earth ever has, despite a civil war that cost a half million American lives - and the lack of a central bank.

A nation - even a modern nation - does not need a central bank. Our nation's first two central banks were organized along the same lines as commercial banks of the time. So one must ask why a national government needs a bank of its own. After all, a government is similar to a business enterprise. It has revenue (taxes and fees) and expenses.

With a central bank, a government need not tax or borrow honestly at all; it can print the money that it wants. In the first years after 1913, the government attempted to maintain some semblance of a gold standard. But as the Progressive Movement elite attacked the gold standard as an obstacle to the government's ability to fund massive programs for social betterment, the people lost its understanding of a gold-backed currency as a protection of their freedoms. Eventually gold ceased to play any role in limiting the quantity of money that government may print. Thus, today there is nothing to prevent the government from spending what it does not first tax from us or borrowing honestly in the credit markets.

This is why I say that 1913 was the date of the American Counter-Revolution. For in that year the relationship between government and the people changed in a fundamental way. The people ceased being the masters of government in the sense that the government had to come to them in order to increase spending. When the government was placed on the road to controlling and monopolizing our money, it obtained the ability to confiscate our wealth without our permission. Over the decades people have grown to acquiesce in this new relationship and now actively lobby government to increase spending on behalf of special interest groups. Since our taxes stay the same and the government manipulates the interest rate, we foolishly think that these programs cost us nothing. But government has wasted real resources by showering the world with paper money to pay for its profligacy. We look in horror at the skyrocketing price of oil and the falling value of the dollar and fail to see that the Federal Reserve Bank makes it all possible. Like a drug lord to an addict, it pushes more of the same paper poison to forestall the inevitable crash.