The Financial Foundation of the United States

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Independence Day is tomorrow, a favorite holiday of Americans and an inspiration to many around the world who are sympathetic to the cause of human freedom and liberty.

While some at Edge aren’t American citizens we all take the message of the Declaration of Independence seriously: A free people has the right and duty to separate themselves from tyrannical abuses of power. 

Bitcoin, for us and many in the broader community, is our modern day declaration of independence. We wish to separate money from the state’s monopoly and their sponsor central banks who many feel have abused their mandates, have acted irresponsibly, and have conferred unearned and unfair privileges on those closest to their awesome authority. 

Today we’re going to go back in time and give a short primer on the early monetary history of the United States, which was anything but boring. Money has always and will always be a contentious issue because it might be our most powerful and important social technology. The people and details are different than our current situation but the broad themes remain the same. 

Money in Pre-Declaration America

Before the Revolutionary War the Colonies were tied to Great Britain’s monetary system, administered by the Bank of England, which used a bi-metallic standard (gold & silver) to back its paper currency. However, the Bank of England didn’t enjoy a monopoly and there were many other monies circulating during the colonial period. There was plenty of foreign currency being used by colonial merchants/traders/shopkeepers, including the Spanish dollar, which was very prevalent, as well as Portuguese, Prussian and French backed forms of currency. And in the deep rural and unclaimed territories of the American continent, commodities such as fur, tobacco, corn, and other commodities were frequently used as money. 

By the mid-18th century, tensions over currency started to heat up as British parliament passed three pieces of legislation over a twenty year period that severely restricted the colonies’ ability to issue paper currency and set up new financial institutions, to the dissatisfaction of many colonists. The Acts of 1751, 1764, and 1773 were sources of grievances amongst the Colonies and added to their growing resentment of the British Empire. Two years after the last currency act was passed, the colonists and the British Empire started to clash and would eventually escalate into the American Revolution.

After separation from the empire, America’s legislative body at the time, the Continental Congress, started issuing its own paper currency known as the “Continental”. Unfortunately, the Continental was subject to massive inflation and counterfeit. It lost so much of its original value the phrase “not worth a Continental” became a popular phrase in the Colonies to describe something of low value. 

As a result of episodes like these and their deep knowledge of history, the American Founders were very familiar and weary of the dangers of paper currency. 

Post-Declaration, Revolution, & The Articles of Confederation

The most important person at the genesis of America’s financial history was Robert Morris. Morris was a wealthy businessman and financier from Philadelphia who served in the Continental Congress, signed the Declaration of Independence, and was the main financier of the revolution itself. He financed funding for supplies, pay for troops, and government spies. Morris literally put his money where his mouth and heart was, putting his personal fortune on the line.

Morris took a young and talented Alexander Hamilton under his wing who fought in the Revolution and was George Washington’s chief aide. During the Revolution, Hamilton and Morris were in contact on all matters relating to war, money, and economics, virtually seeing eye to eye. Hamilton studied history, economic theory, as well as the British Empire and its sources of power. After his study he concluded that great militaries were sustained by access to relatively cheap and abundant credit. 

Hamilton advised the revolutionary effort to not necessarily try to outright defeat the British militarily, which was a massive long shot, but instead seek to “destroy the national expectation of success from which the ministry draws their resources”. Financial markets, bond markets included, are heavily influenced by perceptions of the future.

Hamilton wanted the Americans to put up such an effective and inspiring fight that it would scare the international bond market, making it harder for the already stretched empire to sustain a conflict in the Colonies and weaken their resolve. This gave the war effort a realistic goal for the underdog colonists. In Hamilton’s estimation, the Americans just needed to shake the confidence of the international bond market in the British Empire’s ability to exercise sustained control over their American colonies. Hamilton’s subtle observations and recommendations proved to be right on the money. 

The clearly superior yet stretched British Empire was forced to retreat as the colonists had done enough damage over time to ward off their desire to maintain authority over the colonies. 

Shortly after the revolution, the Articles of Confederation became the de facto ruling document of the American Colonies. Robert Morris, with the help of Hamilton, created the first bank chartered by the newly formed American government: The Bank of North America. Morris and Hamilton designed the bank to facilitate the financing of the war debt, facilitate domestic and foreign commerce, and tamp down on the rapid inflation the colonies had been besieged with during the revolution. 

A few years later in 1784, Hamilton founded the Bank of New York which was a critical piece in New York City’s rise as a global financial center. Hamilton’s bank was very conservative, only holding assets in gold, silver, and low risk bank notes. Hamilton also wrote the Bank of New York’s bank charter and it became the template for subsequent bank charters in the American banking system. 

Although Morris and Hamilton were able to set up moderately successful financial institutions in the new country, the newly formed confederation of colonies was breaking down. A governance crisis was emerging quickly and led to the scrapping of the Articles and the creation of the Constitution which is still the de facto governing document of the United States to this day. 

Post Constitution: First Bank of the United States

The Constitution gave the new federal government the power to mint coinage and borrow on behalf of the United States, but it didn’t lay out how it should be done. The ambiguity about how these powers should or could be carried out lead to one of the more important and consequential debates in American history. 

Before the debate raged on, Robert Morris was the first person the first President of the newly created United States, President George Washington, offered the job of Secretary of the Treasury to. Morris declined the offer and recommended Hamilton as the man for the job. Morris and Washington were very fond of Hamilton so this was an easy second choice for Washington.

Both Morris and Hamilton, the two most important figures in American state finance, had always advocated for a strong Central Bank. Hamilton, now the Secretary of the Treasury, wanted the American economy to mirror the British mercantilist model with some American flavoring. He studied the architecture and operations of the Bank of England, as well as the central banks of France and Amsterdam and recommended theirs as models of success to be emulated. He saw their set up of a mix of public authority and private credit as the best arrangement for the United States. 

Hamilton wrote often about how the English and French governments, along with their central banks, were critical to their rise as economic superpowers. Although heavily influenced by Adam Smith and a friend of markets, he thought of governments as critical to the functioning of markets and economic development. In short, Hamilton didn’t think everything should be left up to the “invisible hand”. Governments had a very necessary and visible hand in money, economic development, and commerce.

Hamilton wanted the government and its sponsor central bank to have great powers, but he also wanted to limit it through the use of metal specie like gold and silver to curtail any inflationary excess the government or the central bank might cause. Hamilton was also influenced by David Hume, a famous Scotish philosopher, who vociferously advocated for hard, sound money as the foundation of a healthy financial system and economy. Hamilton advocated for a central bank that could issue paper money, but that paper had to be backstopped by metal species. The unlimited powers of the current Federal Reserve would have been anathema to Alexander Hamilton and other central bank supporters of that time. They would have found the current set up absurd and a dangerous situation of unchecked financial power. 

The Negation

On the other side of the central bank debate was the first Secretary of State, drafter of the Declaration of Independence, and future President, Thomas Jefferson. Jefferson thought the creation of a central bank was completely unconstitutional and thus illegal as well as a threat to the new democratic republic. Jefferson and his supporters argued that because the bank was not specifically enumerated in the new Constitution the federal government had no right to set it up. 

Jefferson also worried about the potential for corruption and its massive bias tilted towards a certain class of Americans. Hamilton and other central bank supporters were mostly merchants and financiers residing primarily in the North, whereas Jefferson and his supporters were the landed gentry, farmers, and blue collar workers primarily residing in the South. Jefferson thought the bank put the merchant and financier class in a privileged position relative to the agrarian class he represented. 

“Paper money is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted”

Thomas Jefferson

Hamilton wasn’t naive, and did recognize banking and markets were bound to corruption and speculation, but argued that nothing good comes without its costs. Hamilton thought the benefits of a well structured central bank outweighed the potential abuses and was key to strengthening the new Federal government, its national security, and the nation’s developing economy. 

Hamilton Triumphs

In the end, Hamilton and the central bank lobby ended up winning over President Washington, who signed off on the charter of the United States’ first central bank: First Bank of the United States. 

The US government was the largest single shareholder in the bank, but private Americans, as well as European investors, also held shares in the bank. The Bank was largely a success in the early days of the republic, funding the public debt, issuing a stable currency, developing American industry and transportation, and facilitating American trade. Accomplishing almost everything Hamilton sought to accomplish. 

However, the bitter fight fought by Jefferson and others hostile to central banking never really ceased. Although America was developing and the economy was growing rapidly, many felt the spoils of success were not shared evenly or fairly.

Those closest to the Bank seemed to gain disproportionately relative to those further away from the influence of the bank. This phenomenon of the uneven effect of newly printed money was first described by Richard Cantillon, an influential early 18th century Irish-French economist and it became obvious to many that this phenomena was true of the American monetary system.

The Northern merchant and financier class became a new aristocracy of what we would describe as “Cantillon Insiders”. They were the closest ones to the creation of new money and credit. This gave them a privileged position in early American society and helped create a growing angry agrarian populism in the South and the expanding Western frontier of the country. 

Jackson’s Bank War

This growing populism culminated in the election of Andrew Jackson in 1928 who was explicitly suspicious and hostile towards America’s central banking system. By the time of Jackson’s presidency the bank was on its second charter and was coming up for renewal in 1836.

Jackson criticized the Bank on a number of points. Jackson and his supporters claimed the Bank repeatedly abused and violated its charter, its operations were opaque enough to warrant suspicion, and its directors weren’t transparent enough to earn the nation’s trust. In his view, the bank gave elites favored access by using the bank as a personal ATM in modern parlance. He also accused the bank of fraud, bribery, interference in elections, and thought the bank was a threat to the nation’s sovereignty and national security because of its foreign ownership interests. 

After Jackson’s re-election in 1832, Congress passed legislation renewing the charter of the bank and Jackson vetoed the renewal. Congress could not procure a super majority in time to overturn Jackson’s veto. Jackson and his supporters were successful in killing the Second Bank of the United States.

The bank would eventually become a fully private corporation and the United States would not have a central bank until 1913, with the creation of the Federal Reserve System under President Woodrow Wilson. 

Coda

Some of Jackson’s criticisms of the Second Bank of the United States would still hold weight today. Many in our community and many others outside of crypto think central banks around the world have overstepped their mandates and their actions have made the Cantillon insiders in their respective societies much richer, while many outside of that circle barely benefit, tread water, or are hurt by central bank actions. 

Independence Day is a great reminder that it is our responsibility as free people to separate from tyrannical abuses of power, and fortunately the creation of Bitcoin gives us the technical and financial means to do so peacefully without the need for a violent revolution. 

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