Central banking has been a corrupt,
mercantilist scheme and an engine of corporate welfare from its very
beginning in the late 18th century. The first central bank, the Bank of
North America, was "driven through the Continental Congress by
[congressman and financier] Robert Morris in the Spring of 1781," wrote
Murray Rothbard in
The
Mystery of Banking (p. 191). The Philadelphia businessman Morris
had been a defense contractor during the Revolutionary War who "siphoned
off millions from the public treasury into contracts to his own … firm and
to those of his associates." He was also "leader of the powerful
Nationalist forces" in the new country.
The main objective of the Nationalists, who
were also known as Federalists, was essentially to establish an American
version of the British mercantilist system, the very system that the
Revolution had been fought against. Indeed, it was this system that the
ancestors of the Revolutionaries had fled from when they came to America.
As Rothbard explained, their aim was
To reimpose in the new United States a
system of mercantilism and big government similar to that in Great
Britain, against which the colonists had rebelled. The object was to
have a strong central government, particularly a strong president or
king as chief executive, built up by high taxes and heavy public debt.
The strong government was to impose high tariffs to subsidize domestic
manufacturers, develop a big navy to open up and subsidize foreign
markets for American exports, and launch a massive system of internal
public works. In short, the United States was to have a British system
without Great Britain. (p. 192)
An important part of the "Morris scheme,"
as Rothbard called it, was "to organize and head a central bank, to
provide cheap credit and expanded money for himself and his allies. The …
Bank of North America was deliberately modeled after the Bank of England."
The Bank was given a monopoly privilege of its notes being receivable in
all tax payments to state and federal government, and no other banks were
permitted to operate in the country. It "graciously agreed to lend most of
its newly created money to the federal government," wrote Rothbard, and
"the hapless taxpayers would have to pay the Bank principal and interest."
Despite these monopolistic privileges, a
lack of public confidence in the Bank's inflated notes led to their
depreciation and the Bank was privatized by the end of 1783. But Morris
did not give up on his scheme. He recruited a young Alexander Hamilton to
serve more or less as his political puppet within the Washington
administration. (Rothbard called Hamilton "Morris's youthful disciple.")
In fact, the reason why Hamilton became Treasury secretary, despite having
no reputation at all in the field of finance, was the recommendation by
Morris to George Washington. (During the Revolutionary War, when he was an
aide to Washington, Hamilton took the time to write Morris a 30-page
letter proclaiming that he agreed with every one of his ideas about
protectionist tariffs, corporate subsidies, and a government-run bank to
finance them.)
Morris and his fellow Nationalists wanted a
king-like chief executive who would rule over a mercantilist empire, just
as the king of England ruled over his mercantilist empire. They, of
course, would be the ones to advise and instruct the "king" and benefit
financially from such an empire. So their young protégé Hamilton commenced
his seven-year crusade to overthrow the first US constitution — the
Articles of Confederation — by calling for a new constitutional convention
to supposedly "revise" the Articles of Confederation. At the convention,
Hamilton laid out his (really Morris's) plan: a permanent president who
would appoint all the governors and who would have veto power over all
state legislation. Under such a plan, state sovereignty would have been
destroyed, and there would have been no escape from the central
government's high taxes, protectionist tariffs, heavy debt, and
foreign-policy imperialism — the agenda of the Nationalists.
The Hamilton/Morris plan was defeated, of
course, as was the proposal made at the convention to include a central
bank among the delegated powers to the federal government. But the
government was more highly centralized, as "the Nationalist
forces pushed through a new Constitution" and "were on their way to
re-establishing the mercantilist and statist British model…" (p. 193).
They begrudgingly acquiesced in a Bill of Rights in return for the
anti-Federalists' support for the new Constitution. And most importantly,
writes Rothbard,
A critical part of their program was put
through in 1791 by their leader, Secretary of the Treasury, Alexander
Hamilton, a disciple of Robert Morris. Hamilton put through Congress
the First Bank of the…. United States…. modeled after the old Bank of
North America [whose]….longtime president and former partner of Robert
Morris, Thomas Willing of Philadelphia, was made president of the New
Bank.
In making his case to President Washington
for the constitutionality of a central bank, which had been explicitly
rejected at the constitutional convention, Hamilton invented the idea of
"implied powers" of the Constitution. These were "powers" that were not
expressly delegated to the federal government in the document, but could
be "implied" by clever lawyers like Hamilton. This of course became a
roadmap for the total destruction of constitutional limitations on the
powers of the federal government.
The First Bank of the United States
"promptly fulfilled its inflationary potential," Rothbard writes in his
History of Money and Banking in the United States (p. 69). It
issued millions of dollars in paper money and demand deposits "pyramiding
on top of $2 million in specie." The Bank invested heavily in the US
government, and "The result of the outpouring of credit and paper money by
the new Bank of the United States was … an increase [in prices] of 72
percent" from 1791–1796.
Northern
merchants provided the main political support for Hamilton's Bank, whereas
southern politicians like Jefferson supplied most of the opposition to it,
seeing it as nothing more than a vehicle for financing an American version
of the corrupt British mercantilist system, which would be destructive of
liberty and prosperity. They were right, of course, and remain right to
this day.
Thomas DiLorenzo is professor of economics
at Loyola College in Maryland and a member of the senior faculty of the
Mises Institute. He is the author of
The Real
Lincoln,
Lincoln
Unmasked,
How Capitalism Saved America, and, more recently,
Hamilton's Curse. Comment on the
blog.
First
Bank of the United States, Philadelphia, 1791
