A History of Currency: Part 2 ~ Early American Money Cycles

Before reading this article, make sure you check out part 1 here~!

Due to extensive taxes, it was impossible to fund the Revolutionary War using gold/silver. Funding of the war was dependent on printing currency.  This was a form of fiat currency.  It was not backed by any tangible asset. 

There was only speculation that the debt caused from this currency would be paid back over time, through taxes.  This proved to be a failure.  According to the San Fransisco Federal Reserve, the currency was “Easily counterfeited and without solid backing, the notes quickly became devalued, giving rise to the phrase “not worth a Continental.”  This brief period marked the first time that U.S. currency’s value was derived solely from its purchasing power, as it is today.”

That’s directly from the website of the San Fransisco Federal Reserve.  The ones who loan us money have stated that this same system, which was used hundreds of years ago, failed.  But, maybe I’m getting a little too ahead of myself.  Back to the revolutionaries:

With the conclusion of the war, a free, independent country proudly stood tall.  However they were up to their knees in debt.  George Washington recognized this failure stating, “A wagonload of currency will hardly purchase a wagonload of provisions.”  The paper notes had no fiscal value.

Weary of this system, the first amendment specified that “No State shall…coin Money; emit Bills of Credit; make anything but gold and silver Coin a Tender in Payment of Debts;”

In everyday terms: section ten of the first amendment specifies that states can not create their own money or grant bills of credit (remember, the same paper fiat currency that caused a depression).  The only legal form of payment for debt is GOLD or SILVER.

These intellects clearly understood the dangers of a fiat currency and wanted to protect the future of the country from the same devastation.

However, there was a loophole to this law.  While states could not issue currency, Private Banks could.  State chartered banks printed notes that could be exchanged for gold and silver. One discrepancy was that the country had a limited supply of precious metals and could not mint enough.  From 1790 to the mid 1800s, foreign coins were accepted as a legal tender.

Within its first 20 years, the country faced another depression. Desperate for money, Congress gave two trial periods to national banks. First, to the Bank of North America.  Modeled after the system of Fractional Reserve Banking (trust me, we’ll get into this later) used by the Bank of England, the country was scammed and damaged even more.  The second trial was given to the First Bank of the United States. The same thing happened, and the debt continued to grow. When he served as president, Thomas Jefferson said “I wish it were possible to obtain a single amendment to our Constitution – taking from the federal government their power of borrowing.”

The charter for the First Bank of North America (which just so happened to be funded by Rothschild, more on that later) was not renewed.  Ineffective economic choices were made after the bank dissolved. President Jefferson’s  “non-intercourse act”  which would gain more revenue through trades, was a failure. Within months the country entered the War of 1812, not financially prepared for this conflict, once again loans demanded from congress. Just two years later, the country defaulted on its loans and became bankrupt.

In an attempt to save the country, a 20 year charter for a central bank was granted to The Second Bank of The United States. Future president Andrew Jackson and the bank’s president Nicholas Biddle frequently clashed. President Jackson was concerned about the citizens – he feared that the economic power of the bank would threaten the republic and only act in the interest of foreign investors.  When the charter came up to renew the bank, he urged a veto against it.  His reasoning was, “It is not our own citizens only who are to receive the bounty of our government. More than eight millions of the stock of this bank are  held by foreigners… is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country?… Controlling our currency, receiving  our public moneys, and holding thousands of our citizens in     dependence… would be more formidable and dangerous than a military power of the enemy. If government would confine itself to equal protection, and, as Heaven does its rains, shower its favor alike on the high and the low, the rich and the poor, it would be an unqualified blessing. In the act before me there seems to be a wide and unnecessary departure from these just principles.”

During his time as president, Jackson considered his greatest accomplishment to be that he “killed the banks.” In 1832 he demanded that all government deposits be withdrawn from the Second banks and stored them in safe banks. The charter was not renewed and the state chartered banks held control of the nation’s currency.

The state charted banks grew to a size of nearly 8,000. All of which created an unmanageable money supply and massive counter-fitting.  As well as, once again, the use of Fractional Reserve Banking. In need of funds for the Civil War, to campaign the Union Army – the government issued $450,000,0000 in “greenbacks”. These were valued as legal tender and accepted as the national currency. However they were not backed by any kind of tangible value.

President Lincoln embraced this green back solution, stating “The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers….. The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the     Government’s greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be     satisfied. The taxpayers will be saved immense sums of interest,     discounts and exchanges. The financing of all public enterprises,     the maintenance of stable government and ordered progress, and the     conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise  superior to the money power.”  As it should be.  If only these beliefs held true today…’’

Content with the economy, Lincoln intended to implement the greenbacks as the permanent solution. Until, the the National Banking Act was implemented. A single national currency was born and banks were chartered by the federal government.  From this point forward the country’s money supply would be created out of debt by bankers purchasing US bonds and issuing them from reserves for bank notes.

This changed the landscape of the money game, and will be explained further in part 3.  Stay tuned!

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