The First Bank of the United States, the Second Bank of the United States and the Federal Reserve System

Posted by PITHOCRATES - April 2nd, 2013

History 101

Merchants raise their Prices when the Monetary Authority depreciates the Currency

What is inflation?  A depreciation of the currency.  By adding more money into the money supply each piece of currency becomes less valuable.  Let’s assume our currency is whiskey.  In bottles.  Whiskey has value because people are willing to pay for it.  And because we are willing to pay for it we are willing to accept it as legal tender.  Because we can always trade it to others.  Who can drink it.  Or they can trade it with others.

Now let’s say the monetary authority wants to stimulate economic activity.  Which they try to do by expanding the money supply.  So there is more money available to borrow.  And because there is more money available to borrow interest rates are lower.  Hence making it easy for people to borrow money.  But the monetary authority doesn’t want to make more whiskey.  Because that is costly to do.  Instead, they choose an easier way of expanding the money supply.  By watering down the bottles of whiskey.

Now pretend you are a merchant.  And people are coming in with the new watered-down whiskey.  What do you do?  You know the whiskey is watered down.  And that if you go and try to resell it you’re not going to get what you once did.  For people typically drink whiskey for that happy feeling of being drunk.  But with this water-downed whiskey it will take more drinks than it used to take to get drunk.  So what do you as a merchant do when the money is worth less?  You raise your prices.  For it will take more bottles of lesser-valued whiskey to equal the purchasing power of full-valued whiskey.   And if they water down that whiskey too much?  You just won’t accept it as legal tender.  Because it will be little different from water.  And you can get that for free from any well or creek.  Yes, water is necessary to sustain life.  But no one will pay ‘whiskey’ prices for it when they can drink it from a well or a creek for free.

It was while in the Continental Army that Alexander Hamilton began thinking about a Central Bank

During the American Revolutionary War we had a very weak central government.  The Continental Congress.  Which had no taxing authority.  Which posed a problem in fighting the Revolutionary War.  Because wars are expensive.  You need to buy arms and supplies for your army.  You have to feed your army.  And you have to pay your army.  The Continental Congress paid for the Revolution by asking states to contribute to the cause.  Those that did never gave as much as the Congress asked for.  They got a lot of money from France.  As we were fighting their long-time enemy.  And we borrowed some money from other European nations.  But it wasn’t enough.  So they turned to printing paper money.

This unleashed a brutal inflation.  Because everyone was printing money.  The central government.  And the states.  Prices soared.  Merchants didn’t want to accept it as legal tender.  Preferring specie instead.  Because you can’t print gold and silver.  So you can’t depreciate specie like you can paper money.  All of this just made life in the Continental Army worse.  For they were hungry, half-naked and unpaid.  And frustrating for men like Alexander Hamilton.  Who served on General Washington’s staff.  Hamilton, and many other officers in the Continental Army, saw how the weakness of the central government almost lost the war for them.

It was while in the army that Hamilton began thinking about a central bank.  But that’s all he did.  For there was not much support for a central government let alone a central bank.  That would change, though, after the Constitutional Convention of 1787 created the United States of America.  And America’s first president, George Washington, chose his old aide de camp as his treasury secretary.  Alexander Hamilton.  A capitalist who understood finance.

Despite the Carnage from the Subprime Mortgage Crisis the Fed is still Printing Money

At the time the new nation’s finances were in a mess.  Few could make any sense of them.  But Hamilton could.  He began by assuming the states’ war debts.  Added them to the national war debt.  Which he planned on paying off by issuing new debt.  That he planned on servicing with new excise taxes.  And he would use his bank to facilitate all of this.  The First Bank of the United States.  Which faced fierce opposition from Thomas Jefferson and James Madison.  Who opposed it for a couple of reasons.  For one they argued it wasn’t constitutional.  There was no central bank enumerated in the Constitution.  And the Tenth Amendment of the Constitution stated that any power not enumerated to the new federal government belonged to the states.  And that included banking.  A central bank would only further consolidate power in the new federal government.  By consolidating the money.  Transferring it from the local banks.  Which they feared would benefit the merchants, manufacturers and speculators in the north.  By making cheap money available for them to make money with money.  Which is the last thing people who believed America’s future was an agrarian one of yeoman farmers wanted to do.

They fought against the establishment of the bank.  But failed.  The bank got a 20 year charter.  Jefferson and Madison would later have a change of heart on a central bank.  For it helped Jefferson with the Louisiana Purchase.  And like it or not the country was changing.  It wasn’t going to be an agrarian one.  America’s future was an industrial one.  And that required credit.  Just as Alexander Hamilton thought.  So after the War of 1812, after the charter of the First Bank of the United States had expired, James Madison signed into law a 20-year charter for the Second Bank of the United States.  Which actually did some of the things Jefferson and Madison feared.  It concentrated a lot of money and power into a few hands. Allowing speculators easy access to cheap money.  Which they borrowed and invested.  Creating great asset bubbles.  And when they burst, great depressions.  Because of that paper money.  Which they printed so much of that it depreciated the dollar.  And caused asset prices to soar to artificial heights.

Andrew Jackson did not like the bank.  For he saw it creating a new noble class.  A select few were getting rich and powerful.  Something the Americans fought to get away from.  When the charter for the Second Bank of the United States was set to expire Congress renewed the charter.  Because of their friends at the bank.  And their friends who profited from the bank.  But when they sent it to Andrew Jackson for his signature he vetoed the bill.  And Congress could not override it.  Sensing some blowback from the bank Jackson directed that they transfer the government’s money out of the Second Bank of the United States.  And deposited it into some state banks.  The president of the bank, Nicholas Biddle, did not give up, though.  For he could hurt those state banks.  Such as calling in loans.  Which he did. Among other things.  To try and throw the country into a depression.  So he could blame it on the president’s anti-bank policies.  And get his charter renewed.  But it didn’t work.  And the Second Bank of the United States was no more.

National banks versus local banks.  Hard money (specie) versus paper money.  Nobility versus the common people.  They’ve argued the same arguments throughout the history of the United States.  But we never learn anything.  We never learn the ultimate price of too much easy money.  Even now.  For here we are.  Suffering through the worst recession since the Great Depression.  Because our current central bank, the Federal Reserve System, likes to print paper money.  And create asset bubbles.  Their last being the one that burst into the subprime mortgage crisis.  And despite the carnage from that they’re still printing money.  Money that the rich few are borrowing to invest in the stock market.  Speculators.  Who are making a lot of money.  Buying and selling assets.  Thanks to the central bank’s inflationary policies that keep increasing prices.

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Federal Reserve System, Great Depression, Banking Crises, Gold Reserves, Gold Exchange Standard, Interest Rates and Money Supply

Posted by PITHOCRATES - July 31st, 2012

History 101

The Gold Exchange Standard provided Stability for International Trade

Congress created the Federal Reserve System (the Fed) with the passage of the Federal Reserve Act in 1913.  They created the Fed because of some recent bad depressions and financial panics.  Which they were going to make a thing of the past with the Fed.  It had three basic responsibilities.  Maximize employment.  Stabilize prices.  And optimize interest rates.  With the government managing these things depressions and financial panics weren’t going to happen on the Fed’s watch.

The worst depression and financial panic of all time happened on the Fed’s watch.  The Great Depression.  From 1930.  Until World War II.  A lost decade.  A period that saw the worst banking crises.  And the greatest monetary contraction in U.S. history.  And this after passing the Federal Reserve Act to prevent any such things from happening.  So why did this happen?  Why did a normal recession turn into the Great Depression?  Because of government intervention into the economy.  Such as the Smoot-Hawley Tariff Act that triggered the great selloff and stock market crash.  And some really poor monetary policy.  As well as bad fiscal policy.

At the time the U.S. was on a gold exchange standard.  Paper currency backed by gold.  And exchangeable for gold.  The amount of currency in circulation depended upon the amount of gold on deposit.  The Federal Reserve Act required a gold reserve for notes in circulation similar to fractional reserve banking.  Only instead of keeping paper bills in your vault you had to keep gold.  Which provided stability for international trade.  But left the domestic money supply, and interest rates, at the whim of the economy.  For the only way to lower interest rates to encourage borrowing was to increase the amount of gold on deposit.  For with more gold on hand you can increase the money supply.  Which lowered interest rates.  That encouraged people to borrow money to expand their businesses and buy things.  Thus creating economic activity.  At least in theory.

The Fed contracted the Money Supply even while there was a Positive Gold Flow into the Country

The gold standard worked well for a century or so.  Especially in the era of free trade.  Because it moved trade deficits and trade surpluses towards zero.  Giving no nation a long-term advantage in trade.  Consider two trading partners.  One has increasing exports.  The other increasing imports.  Why?  Because the exporter has lower prices than the importer.  As goods flow to the importer gold flows to the exporter to pay for those exports.  The expansion of the local money supply inflates the local currency and raises prices in the exporter country.  Back in the importer country the money supply contracts and lowers prices.  So people start buying more from the once importing nation.  Thus reversing the flow of goods and gold.  These flows reverse over and over keeping the trade deficit (or surplus) trending towards zero.  Automatically.  With no outside intervention required.

Banknotes in circulation, though, required outside intervention.  Because gold isn’t in circulation.  So central bankers have to follow some rules to make this function as a gold standard.  As gold flows into their country (from having a trade surplus) they have to expand their money supply by putting more bills into circulation.  To do what gold did automatically.  Increase prices.  By maintaining the reserve requirement (by increasing the money supply by the amount the gold deposits increased) they also maintain the fixed exchange rate.  An inflow of gold inflates your currency and an outflow of gold deflates your currency.  When central banks maintain this mechanism with their monetary policy currencies remain relatively constant in value.  Giving no price advantage to any one nation.  Thus keeping trade fair.

After the stock market crash in 1929 and the failure of the Bank of the United States in New York failed in 1930 the great monetary contraction began.  As more banks failed the money they created via fractional reserve banking disappeared.  And the money supply shrank.  And what did the Fed do?  Increased interest rates.  Making it harder than ever to borrow money.  And harder than ever for banks to stay in business as businesses couldn’t refinance their loans and defaulted.  The Fed did this because it was their professional opinion that sufficient credit was available and that adding liquidity then would only make it harder to do when the markets really needed additional credit.  So they contracted the money supply.  Even while there was a positive gold flow into the country.

The Gold Standard works Great when all of your Trading Partners use it and they Follow the Rules

Those in the New York Federal Reserve Bank wanted to increase the money supply.  The Federal Reserve Board in Washington disagreed.  Saying again that sufficient credit was available in the market.  Meanwhile people lost faith in the banking system.  Rushed to get their money out of their bank before it, too, failed.  Causing bank runs.  And more bank failures.  With these banks went the money they created via fractional reserve banking.  Further deflating the money supply.  And lowering prices.  Which was the wrong thing to happen with a rising gold supply.

Well, that didn’t last.  France went on the gold standard with a devalued franc.  So they, too, began to accumulate gold.  For they wanted to become a great banking center like London and New York.  But these gold flows weren’t operating per the rules of a gold exchange.  Gold was flowing generally in one direction.  To those countries hoarding gold.  And countries that were accumulating gold weren’t inflating their money supplies to reverse these flows.  So nations began to abandon the gold exchange standard.  Britain first.  Then every other nation but the U.S.

Now the gold standard works great.  But only when all of your trading partners are using it.  And they follow the rules.  Even during the great contraction of the money supply the Fed raised interest rates to support the gold exchange.  Which by then was a lost cause.  But they tried to make the dollar strong and appealing to hold.  So people would hold dollars instead of their gold.  This just further damaged the U.S. economy, though.  And further weakened the banking system.  While only accelerating the outflow of gold.  As nations feared the U.S. would devalue their currency they rushed to exchange their dollars for gold.  And did so until FDR abandoned the gold exchange standard, too, in 1933.  But it didn’t end the Great Depression.  Which had about another decade to go.

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Environmentalists don’t give a whit about Human Happiness

Posted by PITHOCRATES - September 3rd, 2011

Environmentalists just don’t like an Advanced Human Race

Environmentalism is a zero-sum game.  Save the planet.  Kill man.  Either quickly by making cars lighter to be more fuel efficient.  Making them less survivable in an accident.  Or over time by turning the hands of time back.  To a time where there weren’t factories pumping pollution in the air.  Before we used coal to fire our power plants.  Or before we used oil to unleash economic activity.  And exploded our standard of living.

No.  The environmentalist would rather we sit in our own filth.  Subsist only on home-grown vegetables.  And be born, live, work and die within a mile of each other.  They don’t want anything man-made wafting into the atmosphere.  And they don’t want anything pumped from underground.  Or pumped over ground for that matter (see Stung by Obama, Environmentalists Weigh Options by Leslie Kaufman posted 9/3/2011 on The New York Times).

In late August, the State Department gave a crucial go-ahead on a controversial pipeline to bring tar sands oil from Canada to the Gulf Coast. Then on Friday, leading into the holiday weekend, the Obama administration announced without warning that it was walking away from stricter ozone pollution standards that it had been promising for three years and instead sticking with Bush-era standards.

John D. Walke, clean air director of the Natural Resources Defense Council, an advocacy group based in New York, likened the ozone decision to a “bomb being dropped.”

Mr. Walke and representatives of other environmental groups saw the president’s actions as brazen political sellouts to business interests and the Republican Party, which regards environmental regulations as job killers and a brick wall to economic recovery.

And the environmentalists are not pleased.  In fact, they are furious.  They don’t care about double-dip recessions.  Or even depressions.  They don’t care if people live in caves where they eat their vegetables in one corner.  And poop in another.  They just don’t like an advanced human race.

Most People want the Comforts of an Advanced Human Race

Of course, this presents a bit of a problem for President Obama.  These hardcore environmentalists are but a sliver of the population.  But it’s one of many slivers the Democrats need.  It’s the aggregate of these fringe groups that have electoral weight.  Lose a couple and you may simply lose the next election.

The majority of people, though, want the comforts of an advanced human race.  And they vote, too.  Especially those with jobs.  Real jobs.  In the private sector.  The vast majority of which are non-union.  So these people don’t have money to burn.  Like government workers.  The economy is important to them.  Because they want affordable gas for their cars.  They enjoy red meat.  Taking daily showers.  And the pleasures of a luxurious toilet paper.  In other words, they are not environmentalists.  They’re human.  Proud of it.  And they want to keep their jobs.

So far the Obama policies have hurt the economy.  Not helped it.  Stopping the pipeline deal would have only pushed gas prices higher.  Once the depression was over, of course.  The ozone pollution standards, on the other hand, would have made it difficult to get a job.  And left the nation in a permanent economic decline. 

EPA Regulations Equal no New Jobs and higher Consumer Costs

So how bad were these ozone standards?  Pretty bad (see Obama Postpones New Ozone Standards, Has More Work to Do by Nicolas Loris posted 9/2/2011 on Heritage).

This is an important victory for businesses as well as the additional 565 U.S. counties that would have been pushed into non-attainment status and suffered economically as a result.

The EPA’s regulatory overreach on this one rule would have destroyed 7.3 million jobs and nearly $700 billion in economic activity by 2020, and the EPA significantly overestimated the purported health benefits from a lower standard.

That’s an interesting number.  That $700 billion.  This was the cost of extending the Bush tax cuts just for high-income earners.  The Left was angry when Obama extended those tax cuts.  But he said he had to.  Because the economy was too fragile to pull $700 billion out of it.  And here is one EPA standard that will cost the economy that same amount.  Can you imagine the cost of all the other EPA standards?  Perhaps this is the reason why there is no economic recovery.  Too many costly regulations for business to comply with.  For they surely aren’t incentives to expand business.

The costs for states to comply with a tightened ozone standard would have been substantial. These federal mandates for more strict ozone pollution can discourage companies from expanding, and counties that do not meet attainment measures could have lost federal transit funding. As Heritage Visiting Fellow Andrew Grossman writes:

“The economic consequences of non-attainment are severe. New and modified sources—factories, power plants, and the like—in non-attainment areas must employ costly emissions control technologies and offset emissions by taking other industrial capacity offline, directly costing jobs. At best, this drives up the cost of development and discourages businesses from expanding. At worst, it is a near prohibition on new industry. And where businesses are unable to relocate—such as is often the case with utilities—the result is higher costs for consumers.”

EPA regulations equal no new jobs.  And higher consumer costs.  For what?

From 1980 to 2005, when levels of ozone and other pollutants fell in the United States, the number of asthmatics increased by 75 percent. In fact, some of the lowest asthma rates in the world are found in highly polluted developing countries in the former Soviet Union, while countries in Western Europe have considerably higher asthma rates and relatively lower levels of air pollution.

What is clear and well established, however, is that improved economic well-being means that people are healthier and live longer. A tighter ozone rule would slow economic growth, reducing economic well-being.

Nothing, apparently.  They want to hammer businesses with these new costly regulations just to feel good.  For history has shown that there are other contributing factors to asthma.  Perhaps it’s Dr. Spock‘s fault.  For there is ample evidence now that bottle-fed babies develop more allergies.  Perhaps this is the cause.  And not the clean ‘dirty’ air of 1980-2005.

We die Young and the Earth stays Pretty

For a polluted planet the earth is pretty damn clean.  And healthy.  We’re living longer.  And the more improved economically we get the longer we live.  This was the core argument for giving us Obamacare.  The richest nation in the world should be able to provide health care to all.  So even the Left must see the benefits of a booming economy.  It buys them all the things they want.  While other people pay for it.

But the environmentalists don’t care.  Not the hardcore ones.  They’d prefer to see the human race regress back to a simpler time.  When we were just beginning to walk upright.  Before we spoiled Mother Nature.  With all of our thinking.  

And if that means living to a ripe old age of only 30, so be it.  The less we live the less damage we can do.  We die young.  And the earth stays pretty.  Nothing would make them happier.  Ending human happiness.

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