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The 2nd and 3rdCentral Banks of the United States 2nd series

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Message Peter Palms
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(Article changed on March 18, 2014 at 16:28)

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 President 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. 1

1. Letter to John Taylor November 26, 1789 Quoted by Martin A Larson, the continuing tax rebellion (Old Greenwich, Connecticut: Devin-Adair, 1979,p,xii,

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In any event, there is no denying the fact that the Bank of the United States ,the second central 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 per cent 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."

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The development of this plutocracy was well described by Governor 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. 1

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 of common sense of  the American public. Unfortunately, the picture is not that pleasing. It is true that the Jeffersonian Republicans were elo quently 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.

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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.

Summary of the Third Central Bank called the Second Bank of the United States.(details in third series0

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