America’s First Flirtation with Fiat Money
Thomas Allen
America’s first flirtation with fiat money after the adoption of the Constitution of 1787 occurred during the War of 1812.
On the eve of the War of 1812, money in the United States consisted of gold coins, silver coins, bank notes, and, to a lesser extent, checkable deposits (checkbook money). As gold was undervalued by the legally fixed exchange ratio between gold and silver under the United States’ bimetallic monetary system, little gold circulated. Since the expiration of the first Bank of the United States, State-charted banks issued the bank notes in use. The silver coins that circulated were mostly halves, quarters, dimes, and half-dimes.[1] Because of a lack of gold and silver coins, bank notes were the most commonly used form of money. Foreign gold and silver coins in bank vaults secured these bank notes.
Some believe that an underlying cause of the War of 1812 was to get the Bank of the United States rechartered.[2] Congress chartered the first Bank of the United States in 1791 for 20 years. Congress failed to recharter the Bank before its charter expired in 1811. The money interest wanted a national bank that would function like a central bank.
When it organized the first United States Bank, the U.S. government bought 20 percent of its capital stock. The government bought its shares with a loan from the Bank itself to be paid in ten annual installments. (Later, to pay its original loan from the Bank, the U.S. government sold its shares for a profit.) Private investors bought their shares with one-fourth specie and three-fourth government securities. Thus, most of the capital of the Bank was the credit of the government. The voting of shares was designed to prevent a small minority from controlling the bank. Furthermore, foreign shareholders could not vote by proxy. The Bank could not hold real estate beyond the immediate accommodation of its business. However, it could lend on mortgage securities. Its deposits were not counted as liabilities when computing its right to contract debt. Thus, it was not to lend more than $10 million, the amount of its capital stock, above its deposits. If it contracted debt greater than its capital stock above deposits, the directors were personally liable to the creditors of the Bank. Its notes were receivable for taxes as long as they were redeemable in gold and silver coin. However, the Treasury was not required to deposit public funds in the Bank. The Bank could have branches. It could not engage in any trade other than banking except it could sell any good taken for nonpayment of debt. The U.S. government promised not to charter any competing bank.[3]
The Bank performed many functions of a central bank for the United States. It collected funds from importers for customs duties. It held and transferred funds for the U.S. government and paid and lent the money to the order of the U.S. government.[4]
The Bank also acted like a central bank in that it regulated, at least indirectly, the issuance of bank notes by State banks. It did so by quickly redeeming the bank notes issued by State banks that it received. This action braked the issuance of bank notes by State banks. If a State bank refused to redeem its notes in species, the Bank of the United States would not accept that bank’s notes.
As its notes were legal tender for payments to the U.S. government, its notes functioned like notes issued by a central bank. They were widely accepted without a discount.[5]
Holding the revenue of the U.S. government and issuing bank notes that were receivable (legal tender) for payment of taxes, fines, and other dues to the U.S. government gave the Bank of the United States a great advantage over State banks. This Bank was "the first appearance of organized money power in the United States." [6]
Before the Bank’s charter expired in 1811, Secretary of the Treasury Albert Gallatin recommended its renewal. President Madison, who had opposed its original charter because it was unconstitutional, remained neutral on renewing the Bank’s charter.
As war with England and perhaps France seemed imminent, Gallatin urged rechartering the Bank to aid and finance the war when it came. He also recommended that Congress require the rechartered Bank to lend 60 percent of its capital to the U.S. government if the U.S. government demanded.
Opponents of rechartering the Bank of the United States noted that foreigners, mostly English, owned most of the shares of the Bank. Of the 25,000 shares, foreigners owned 18,000.[7 ]Opponents construed dividends paid on these shares as tribute to foreign interests. Gallatin responded that the foreigners had no vote in the Bank’s affairs and that most of the Bank’s capital would be paid to these foreigners if Congress did not recharter the Bank.[8 ]
In the end, opposition to the Bank itself, to English ownership, and to Gallatin personally was just enough to prevent the rechartering of the Bank. The House approved rechartering by one vote. With Vice-President Clinton voting against rechartering after the Senate vote was tied, the rechartering of the Bank failed.[9] Thus, the Bank was liquidated, and the United States went to war with Great Britain the following year.
The demise of the Bank of the United States did encourage the growth of State-chartered banks. In 1811, 88 State banks existed. By 1816, this number had grown to 246.[10]
Those who would have profited from the war by the Bank of the United States creating money to buy U.S. securities moved to State banks. As with nearly all wars, loans financed the War of 1812 more than did taxation.[11] (If people had to pay for wars by taxation as they were fought, few wars would be fought.) Most of the States that supported the war opposed raising taxes to pay for it.
Some believe that behind the War of 1812 was the money interest, especially the Rothschild banks of Europe. They brought about the war to punish the United States for not renewing the charter of the Bank of the United States and to force Congress to charter a new national bank.[12]
The standard explanation for the war was the impressment of American seamen. If this were the reason, why did the region most affected by impressment, New England, strongly object to the war even to the point of pursuing secession? Impressment affected New England much more than it did any other region. Why did the strongest support for the war come from the West and South, which impressment did not directly affect? Why go to war with England since France’s restrictions on American shipping were worse than England’s? If the problem were with American shipping, why did the United States not build up the navy to protect American ships and seamen? War with England would devastate American shipping.
The underlying reason for the war was the annexation of Canada.[13] As with most wars, the money interest, bankers (except New England bankers) supported the war. They stood to profit from it with their loans to finance it.
After the war started, the U.S. government began borrowing from State banks. As banks monetized (created money to buy) U.S. government securities, they became unable to honor their contract to redeem their notes on demand. With the British capture of Washington in 1814, most banks outside New England suspended redemption.[14] Irredeemable paper money flooded the country. By 1816, the banks had issued $170 million while they held only $15 million in gold and silver.[15] Bank notes in circulation increased from $45 million in 1812 to $100 million in 1817.[16] Redemption did not return until 1817; the new Bank of the United States would not accept irredeemable bank notes after December 1817.[17]
These irredeemable bank notes were not true fiat money. All traded at a discount. The amount of the discount varied with the issuer. They were not legal tender. The gold and silver standard was not abandoned and was used to calculate the present value of bank notes based on the expectation of future redemption.[18 ]
Besides financing the war through borrowing, the U.S. government issued treasury notes. These treasury notes were receivable in all payments due to the U.S. government.
The first notes were issued in 1812 and bore an interest of 5.4 percent. They expired in one year. In 1813 and 1814, more treasury notes were issued.
As most banks outside New England had suspended redemption, bank notes were exchanged at various discounts. The Secretary of the Treasury Alexander Dallas and others proposed issuing legal tender notes to stabilize the currency.
Under this influence, Congress authorized in 1815 the issuance of treasury notes, which are often called Treasury Notes of 1815. Like the earlier treasury notes, the large notes bore an interest rate of 5.4 percent. Notes less than $100 bore no interest.[19] Like the earlier treasury notes, these notes could be used to pay duties, taxes, and other payments to the U.S. government. Unlike the treasury notes issued earlier, which were made payable within a year, these notes had no redemption date. Also unlike the earlier notes, the small notes of this issue were issued with the intent that they would be used as money, and they were. As they lacked legal tender status, they never became a true fiat currency like the U.S. notes of 1862 (greenbacks).
Dewey describes the treasury notes issued between 1812 and 1815 as follows:
(1) Notes issued under the first two acts were in denominations of not less than $100; under the next two in denominations of not less than $20; and under the last from $3 upwards. (2) Notes issued under the first three acts were not originally fundable into stock, but were subsequently made so by the acts of December 26, 1814, and February 24, 1815. The notes of 1815 were made fundable by the act of issue. (3) Notes issued under the first four statutes were made payable in one year; under the last at no fixed date. (4) All save the small treasury notes, which were non-interest-bearing, bore interest at a rate of 5 2/5 per cent. (5) None of the notes bore a formal promise to pay coin on demand, but all were in form of a receipt for all dues payable to the government. (6) None had any legal-tender qualities, though it is likely that such notes could have been issued had the war lasted a little longer. (7) The notes, with the exception of the later issues, were too large to get into general circulation. (8) The notes remained at par in specie until banks generally suspended specie payments in August, 1814. (9) At the close of the war the notes remaining outstanding were rapidly funded into interest-bearing stock.[20]
When banks suspended redemption, their ability to make additional loans to the U.S. government effectively ended. America now had to choose between peace and fiat legal tender money. It wisely chose peace.
The War of 1812 concluded in February 1815 when the Senate ratified the peace treaty, which had been signed in December 1814. The war lead to the charter of the second Bank of the United States in 1816, which the Panic of 1819 followed.
Appendix
Some people believe that powerful money interests, primarily European money interests, were behind the establishment of the first Bank of the United States. When Congress failed to recharter the Bank, the money interest precipitated the War of 1812 to punish the United States for not rechartering the Bank of the United States and to get a new national bank chartered.
The international financiers of Europe, led by Mayer Amschel Rothschild, wanted to acquire a monopoly over the issuance of money and credit in the United States as they had in most of Europe. They chose Alexander Hamilton, who was described as a "tool of the international bankers," as their agent to aid them in achieving this goal. Hamilton supported a central bank and a strong central government run by a wealthy elite. He also claimed that a national debt was a national blessing.[21]
In 1789, President Washington appointed Hamilton as his Secretary of the Treasury. From this position, Hamilton could effectively argue for a central bank and eventually did succeed in getting a central bank established. Congress authorized the establishment of the Bank of the United States in 1791, which was known as the first Bank of the United States.[22]
Being modeled after the Bank of England, the first Bank of the United States created a partnership between the government and the banking interest. Like all the central banks in the United States that followed it, the first Bank of the United States was a private corporation. The government of the United States owned 20 percent of the shares. Of the remaining shares, the Rothschilds and their agents owned a substantial part—so many shares that they were considered the power behind the Bank of the United States and its establishment.[23] Through the Bank of the United States, the European bankers planned to gain control of the money supply in America. With the Bank of the United States, the bankers created inflation through factional reserve notes[24] (the quantity of notes issued exceeded the gold and silver and real bills of exchange backing them). Thus, they transferred wealth from the common people to the merchants and governments who received the loans and to themselves.
The Bank’s charter expired in 1811. When Congress refused to renew it, the War of 1812 erupted. The objective of the war was to impoverish the United States and force the government to obtain loans from the Bank of England, which Nathan A. Rothschild controlled. If Congress renewed the charter of the Bank of the United States, the money interest would lend to the government. The scheme worked. In 1816, Congress renewed the charter.[25] The new bank became known as the Second Bank of the United States.
Foreign bankers controlled the Second Bank of the United States through their frontmen as they had controlled the First Bank of the United States. The principal agents in controlling the Second Bank of the United States were John Jacob Astor, Steven Girard, and David Parish. (Parish was an agent of Salomon Rothschild’s bank in Vienna during the War of 1812.)[26 ]
Endnotes
1. President Jefferson suspended the free coinage of silver dollars in 1806. (None were struck after 1804.) Most U.S. silver dollars were exported to the East Indies and South America where they passed at tale with the Spanish dollar, which contained seven grains more silver than the U.S. dollar. Thus, traders exchanged one U.S. dollar for one Spanish dollar and gained seven grains of silver. They took the Spanish dollars to the U.S. mint and got them coined into U.S. dollars. They gained a profit of seven grains of silver for each Spanish dollar recoined as a U.S. dollar. Thus, they gain more U.S. dollars to obtain more Spanish dollars. As a result, U.S. silver dollars vanished in the United States, and Spanish silver dollars vanished in the Orient. To end this lucrative trade, Jefferson ended the coinage of silver dollars.
2. Davis Rich Dewey, Financial History of the United States (1922; reprint, 8th ed., Elibron Classic, 2005), p. 100. M.W. Walbert, The Coming Battle: A Complete History of the National Banking Money Power in the United States (1899; reprint, Merlin, Oreg.: Walter Publishing & Research, 1997), p. 4. Horace White, Money and Banking (Boston, Mass.: Ginn & Co., 1896), pp. 260-262.
3. Frederick A. Bradford, Money and Banking (4th ed., New York, N.Y.: Longmans, Green and Co., 1938), p. 267. Dewey, p. 101. White, p. 262.
4. Bradford, p. 269.
5. Walbert, p. 4.
6. Dewey, p. 127.
7. White, p. 264.
8. Ibid.
9. Bradford, p. 270. Dewey, p. 144.
10. Howard S. Katz, The Warmongers (New York, N.Y.: Books in Focus, Inc., 1979), p. 54.
11. Katz, pp. 53-55.
12. White, pp. 269-270.
13. Katz, p. 58.
14. Dewey, p. 144.
15. Dewey, p. 150. White, p. 269.
16. Joseph French Johnson, Money and Currency in Relations to Industry, Prices, and the Rate of Interest (revised ed., Boston, Mass.: Ginn and Co., 1905), p. 343.
17. Dewey, pp. 136, 137.
18. Ibid., p. 137.
19. Jim Marrs, Rule by Secrecy: The Hidden History that Connects the Trilateral Commission, the Freemasons, and the Great Pyramids (Perennial ed., New York, N.Y.: HapperCollins, 2000), pp. 66-67.
20. Archibald E. Roberts, Emerging Struggle for State Sovereignty (Fort Collins, Colo.: Betsy Ross Press, 1979), p. 149.
21. Marrs, p. 68. William T. Still, New World Order: The Ancient Plan of Secret Societies (Lafayette, La.: Hunting House Publishers, 1990), p. 147.
22. Marrs, p. 68.
23. Marrs, p. 68. Roberts, p. 149.
24. Roberts, p. 149.
Copyright © 2009 by Thomas Coley Allen.
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