Banks are among the oldest businesses in American history, but they have changed in many ways through the years. Today, banks offer a wider range of services than ever before, and they deliver those services more efficiently.
But banks weren’t always as cut and dried as they are today. There were no modern American banks as late as 1781, let alone a central bank to oversee banking and finance. This resulted in some major problems, like financial instability, unemployment, and a chaotic currency.
In this episode of Fiscally Savage, Dylan wades through the drama and pageantry that is the US financial system. What did it look like in the years following the Revolutionary War? What led to the creation of the Federal Reserve? And what does all this matter to the average American?
- [01:20] How Alexander Hamilton laid the foundation for the US Federal Reserve
- [03:09] Why Thomas Jefferson opposed the National Bank
- [06:27] Jefferson’s view on national debt
- [08:52] Why the Second Bank of the United States was established
- [10:51] The difference between the First Bank of the United States and the Second Bank of the United States
- [11:24] Andrew Jackson concerns about the National Bank
- [12:52] Land speculation during Jackson’s presidency
- [14:06] The issue with buying land with paper money against held gold reserves
- [16:05] Jackson and the Bank War
- [18:43] The effect of Jackson abolishing the Second Bank of the United States and demanding that all federal land be purchased with gold and silver
- [19:54] Abraham Lincoln and the Free Banking Era
- [24:36] Why the history of banking in the US ultimately matters to the average American citizen
- [28:09] Closing statements
[00:00:00] Intro: Forget the civilized path. It’s time to break the chains of debt and dependency, take control of our financial lives, and live free. This is the Fiscally Savage Podcast.
[00:00:15] Dylan Bain: Hello and welcome to Fiscally Savage. I’m your host, Dylan Bain. Today, we’re gonna continue a conversation we started last Friday. What is the Federal Reserve System in the United States? Now, on these Friday shows, they’re different than our Tuesday shows, which are very much focused on helping you get the tips, tools, strategies, and techniques you need to take control of your financial future and live free. On the Friday shows though, we are doing more of a current events thing, which is really more of an explainer of what’s in the news, what’s the one step below the surface when you’re reading things.
[00:00:48] And when I started talking about the Federal Reserve, I obviously pop open a couple of resources, get to some, you know, historical documents. I’m a huge fan of US History, so exploring that from a financial perspective was really cool. And one of the things that I came across, and I guess I did know this but I was reminding myself of it as I was doing research for last week’s Friday episode, was just kind of the drama and pageantry that is the US financial system because from the beginning it was controversial.
[00:01:20] And so, if you’ve seen the musical “Hamilton,” it’s all about the founding father, Alexander Hamilton, an immigrant from the Caribbean who came to the United States, fought in the Revolutionary War, was a friend of Marquis de Lafayette and George Washington, was our very first secretary of state under the US Constitution after the dissolution of the Articles of Confederation, which was the first government for the colonies after the American Revolution. And his establishment of the financial system, that eventually became the model for a lot of the financial systems across the globe. It is noted by a number of historians that Alexander Hamilton was a genius-level intellect in how he created the system. But to me, that’s not even the most interesting story. To me, it’s his opponents who we’re gonna focus on today. Because when we talked about the establishment of the Federal Reserve System, we noted that it was established as a public-private partnership in 1913. But it’s not like that was the first time we had a central bank. And just to remind you, ladies and gentlemen, a central bank is a bank within a sovereign entity, a country, in this case, the United States, that is responsible for fiscal policy, regulation, the issuance of currencies, and the maintenance of the monetary policy within that economy.
[00:02:38] And so, our very first national bank, which was called the First Bank of the United States, was established after the Revolutionary War with the establishment of the US Constitution. And the idea behind this was to create a one-stop shop, a lender of last resort for the banking system in the United States as set up by the first Secretary of State Alexander Hamilton. The other thing that this bank was set up to do was to actually handle US debt, which of course then made it a target of Thomas Jefferson.
[00:03:09] So Thomas Jefferson, famously our third president of the United States, hated banks, like hated banks with a passion. And this was a big source of his friction with Alexander Hamilton. And if you’ve seen the musical, they note this in the second half of the musical, that these two founding fathers saw eye to eye on next to nothing. And so, Thomas Jefferson, from a financial perspective, refused to renew the charter for the First Bank of the United States in 1811. So we established a bank in 1790 under Alexander Hamilton. It had a 20-year charter, so it had to be renewed by Congress every 20 years. And Thomas Jefferson opposed that and stopped it from happening. His reasoning for hating the bank was that he saw banking as an institution of corruption, a source of tyranny that the government could extend and extort over people from a financial place. And if you’re thinking to yourself, oh my gosh, this rhetoric sounds like a lot of stuff I’ve been hearing since 2008, well, that’s because it’s exactly his argument continuing on into the present day.
[00:04:18] He really thought that the way the banking system should be done would be left up to the states and he felt that I centralized federal institution would undermine the state banks who were better positioned to look at their local economies and make decisions based upon those local conditions as to what type of currency, what percentage of reserves they should hold, what lending practices they should adopt, and leave it at that state level. And he also felt that allowing the financial power of the system to consolidate in the hands of a few wealthy financiers would unfairly advantage merchants and financiers and commercial operations over plantations and small family farmers. He also felt that one of the roles of a central bank is to issue credit, and that’s the role of banks generally. But in this particular case, issuing credit against the full faith of the US federal government. That is, the central banks are the ones that issue government debt. Thomas Jefferson felt, at least outwardly and politically when he was speaking, he felt that the national debt was immoral and dangerous.
[00:05:24] Now, when you might look at the United States national debt right now, and I will probably do an entire episode on a Friday about the national debt when we hit the debt ceiling again in the world’s dumbest game of chicken, he might have had a point. And one of the big mistakes we make as soon as we start talking about the national debt is to start comparing it to our household budgets. They’re not comparable, ladies and gentlemen, but I’m not gonna talk about that now. What is important is that Thomas Jefferson pointed to the national debt and the national debt at this particular time, just so that you fully understand, during the American Revolution, each and every state created the Continental Congress, but those states were their own individual sovereign entities. And so, those states paid their soldiers that, you know, they were organized in the regiments of the state, you know, then put under the command of an overall commander, they would pay their soldiers in bonds, basically IOUs. They pay them in government debt. And they would issue government debt to wealthy merchants, traders to be able to buy the munitions and the supplies they needed to persecute the war of independence.
[00:06:27] Well, part of Hamilton’s plan was to actually consolidate all of those state debts into the national debt. So what Thomas Jefferson was pointing to and saying, this is bad, this is immoral and dangerous, was actually the debt we incurred to win the War of Independence, which is kind of like an interesting footnote to look at. And he continued to look at the national debt as this immoral thing right up until in his presidency he had the option to buy the Louisiana territory from France, thus doubling the size of the United States. This, of course, is the famous Louisiana Purchase, which he used the First Bank of the United States to issue credit against the full faith of the US government in order to be able to have the funds to give to Napoleon to buy Louisiana.
[00:07:12] So this is kind of where you start to question Jefferson’s motives. And this is, I think at least in my mind, one of the things that’s interesting about this type of discussions on the political side, when everybody, somebody starts saying, well, I wanna destroy this institution and I wanna be able to push all the power back to the little man, but then they really seem to use that power whenever it suits their purposes, which brings me to, you know, remember, Jefferson’s whole thing was, you know, debt is immoral and dangerous and a national bank advantages merchants and financiers over plantation and farmers. And ladies and gentlemen, I’m sure the fact that Jefferson himself was a heavily indebted plantation owner with a taste for the fine things in life with a flamboyant outward persona, had absolutely nothing to do with his hatred of banks. Lord knows the people I owe debts to I love, right? But that’s where I get into this idea that this is really interesting to me because the personalities are just so profound at this time and they mirror a lot of what we’re talking about and we see a lot in the news today.
[00:08:23] So when Jefferson refused to renew the bank’s charter in 1810, it dissolved in 1811. And if you know your history, you know what happens the next year after that. That’s the war with the British again part two, the War of 1812, that of course saw the White House burned, the British, you know, marching through the streets of DC, and so on and so on. And you will also then know that one of the, you know, the heroes of that war was Andrew Jackson in the Battle of New Orleans.
[00:08:52] And so, when we get to the establishment of the Second Bank of the United States, it was established in 1816 because, remember what happens if we don’t have that centralized bank, all of this gets pushed down to the individual state banks, which in theory should be making good decisions for their local areas except they don’t. And what happened was, due to the War of 1812, a lack of financial discipline, every state going for itself, we ended up with an actually massive inflationary environment because the paper currency that these banks were issuing against their held gold and silver reserves, there was a lot of doubt as to what the actual value of that currency was. Uncertainty is the toxin that kills the financial system because when people will say, well, if we go to the gold standard, we wouldn’t have inflation. What happened after the War of 1812 is a great example of that not being true. And the other part about it is when we say, well, it’s fiat currency, that’s what our current US dollars are, that’s what all, well, I can’t say all ’cause I don’t know for sure, but all of the major currencies are fiat currencies. “Fiat” means to declare. And what that means is that the dollar has a value because we all believe it has a value, just like we all wanna believe that gold has a value. And so, the declared value of these other currencies are no more as tangible as the paper currencies issued against gold and silver reserves.
[00:10:18] Now, I want you to put a pin in that because we’re gonna talk about that here in a second. But the United States was in a pickle after the War of 1812 because they were having, you know, they were not being able to get back up on their feet because of these inflationary drivers, because of the financial chaos, made lending, regulation of the banks, westward expansions, expansions of the economy, all extremely difficult to do. So Congress got back together and issued the next national bank charter for the Second Bank of the United States in 1816. Now, this was all fine, well, and good. It was very much modeled after the first one with a couple of noted differences.
[00:10:51] The First Bank of the United States was a lender of last resort. It managed the currency, managed fiscal and monetary policy, and all of the things that we would expect a central bank to do except the Second Bank was solely on the currency. It didn’t actually, it was not all under the last resort. It did not set fiscal policy or monetary policy. It in fact just regulated currency. And that was all they really wanted from it at the time. Now, this bank didn’t fare any better when its charter was up for renewal than the first one did. And that of course happened under President Andrew Jackson.
[00:11:24] So Jefferson, Jeffersonian ideas, Jackson, Jacksonian ideas, if you’re into US history at all, you’re going to run across these types of ideas because Jackson, like Jefferson, liked to talk a big game about being a champion of the little guy. And Jackson, he really believed that the states should have their own currency and that the power of the banks, if they were allowed to consolidate in the hands of few people, i.e., a central bank, then that bank and those bankers would become the new aristocracy of the United States. That is to say that they would have these large pools of generational wealth, tons of political and economic power within the economy, and they would be able to use that to undermine the government due to a lack of regulation, and, therefore, they would engage in bad practices, which would then drive inflation. That was Jackson’s actual concern, not necessarily that the bank itself was a problem, but that it didn’t have enough regulations on it to actually be transparent enough that it could be trusted. And that he really believed that a lack of discipline would drive inflation. Inflation is a text that hits all of us. And if you remember, what was happening during the War of 1812? Oh yeah, that’s right. We didn’t have a national bank and there was all of this inflation. Jackson was a younger man at that time. He would’ve had a direct impact upon him because of that inflation, which clearly left a scar.
[00:12:52] Now, the other thing about this is that because the Second Bank of the United States really only focused on currency and credit policies that was issued paper money against held gold reserves, this had the effect of driving westward land speculation. So if you remember, this is the period of time in the United States in which it’s the idea of manifest destiny. The United States is pushing westward into the territories that will eventually become the states of Kansas, Missouri, Nebraska, you know? This is the time when the Republic of Texas is a thing. Jackson went and recognized the Republic of Texas as an actual entity and, therefore, there was a lot of land speculation, a lot of opportunities for money to be made, credits being extended, people are buying up land, not unlike the housing bubble we’ve seen over COVID. And the reason that this is important to this story is because Jackson kind of looked at all that land speculation and said, yes, please. I would love me a piece of that. And he got screwed on a number of deals that put him very much in debt to the banks. The reason he got screwed was that these land deals were being done on paper money issued by a bank against held gold reserves.
[00:14:06] So the bill, the dollar bill you had, it wasn’t the US dollar at the time ’cause it didn’t exist, but it represented a certain amount of gold held at that bank. So let’s say for a moment that I bought, say a piece of land and I held it for a little bit, and then somebody comes over to me and says, hey, Dylan, I’d love to buy this piece of land. And I say, great. It’s going to be $20,000, which would’ve been a huge amount of money back then. But I say it’s $20,000, and they come up to me and they flip off enough bills at the local state bank for me to have, and I take it and I say, cool. And I want to go down and I’m gonna trade my bills at that local state bank for some hard currency ’cause I actually wanna have the silver in my hand. I wanna do my Scrooge McDuck and let it, you know, throw it in the air and let it bounce on my head and, you know, if I had enough of it, I could make a vault and swim through it, right? ‘Cause I’m Scrooge McDuck and this is gonna be a cartoon here soon. But the point that I’m getting to is that what happens if that bank goes under? So now, I’ve sold my land, I’ve traded the deed over for pieces of paper, the bank is now bankrupt, that gold is now gone. What happens to my bills? Well, I might as well use them to start a fire because that’s about how useful they are at this point.
[00:15:17] So Jackson, in his mind, had gotten screwed by this paper money because of a lack of regulations in the banking sector. And the Second Bank was supposed to fix that, but of course it didn’t. It just drove more land speculation. And this of course made Jackson very poor and also made him two other things as well. He hated banks and debt, and he also became a hardcore gold bug. That is to say, he really started to believe that gold and silver were the only currencies that you should use as medium of exchange. Now, there’s a lot to be said about gold reserves and gold standards in specie, which is the actual, you know, we’re not gonna use paper money species. We’re going to use the actual gold and silver itself. But that’s gonna come back to haunt the whole nation.
[00:16:05] Because what happened was when Jackson was president, he went to what was called the Bank War and ran on a platform that he was not going to renew the bank because it was just an institution of corruption. Hey, where have we heard that before? It’s not like Jefferson might have said that. And it’s not like Andrew Jackson didn’t have enough context as to what was going on. I mean, this guy did do his own share of Western exploration and adventuring with Aaron Burr. Hey, where have we heard that name before? Yeah, Aaron Burr, the same guy who shot Alexander Hamilton, who created the banking system that Jackson hates so much. Yeah, they were friends. And after Burr lost his political career for killing Alexander Hamilton, he went West to go adventuring and he brought with him his good buddy, Andrew Jackson. Yeah, all of this was connected and all of the founding fathers knew each other and they all kind of hung out and did lots of stuff together. Like I said, this is fascinating to me because, man, watching the personalities is better than an afternoon soap opera.
[00:17:07] At any rate, Jackson ends the bank. And not only does he end the bank, but he also looks at Western land speculation and says, we need to do something about that. So he creates an executive order that all land purchases, ’cause they were purchasing it from the federal government, which is a note I should have put in earlier in the show, but they’re purchasing this land from the federal government, and Jackson says that he will only accept hard currency. And that means when you go to buy the land, you need to show up with the gold in hand, the physical, actual gold in hand. And the federal funds that were stored at the Second Bank on the United States, Jackson split that up and had them funneled into very selected handpicked state banks. So much for the “we’re not gonna be corrupt about this” because those would then became referred to as his “pet banks.”
[00:17:59] Now, Andrew Jackson, when he made this, he did it with all the right intentions. And there’s much that can be read about Jackson’s presidency. He is the architect of the Trail of Tears. He was the first president in which there was an attempted assassination against him and rather than run away, he charged the guy who pointed the pistol at him and then started beating his would-be assassin with a cane. Andrew Jackson’s a colorful guy. And at the end of the day, whether he really cared about the little guy or not, that’s open for historical speculation. But I am gonna make, put my marker down on that he actually thought he was doing a good thing when he demanded that all real estate land speculation be done in specie, which means in the physical gold and silver.
[00:18:43] But of course, stop and think about how that would logistically work. When you buy land, you typically go take out a mortgage, right? You get a loan. Well, banks with issuing credit allows you to be able to buy that land and were able to move the funds around without having to have a wheelbarrow of metal that were then transporting across the plains to be able to exchange in, you know, for a deed. What happened with this, of course, was when the credit dries up, what happened in 2008? Oh yeah. A real estate crash. And so, that was the effect of Jackson abolishing the Second Bank of the United States and demanding that everything be done in gold and silver. It created a real estate crash, which then created a shortage of hard currency because a bunch of banks went under and that triggered a financial panic. We’d call that a financial crisis today. But a ton of banks went out of business, people lost a whole ton of money. And that panic where the US economy just froze up, nothing could actually move, a lot of people lost their jobs, a lot of families were disintegrated by the economic tide at the time. That lasted for a good seven years before we even thought about trying to pull our way back out of this.
[00:19:54] And it wasn’t until we get to the presidency of Abraham Lincoln in 1863 that we actually start recovering from this panic. That panic only lasted seven years, but the US as a banking system didn’t exist after this point, and this is what’s known as the Free Banking Era. So from 1841 to 1863, we don’t have a national bank, which means that the state banks, now we’re back to the state bank thing, right? The state banks are issuing their own currencies, which makes interstate commerce really difficult because if I’m sitting in say, Wisconsin, and I wanna do a deal in Illinois, well, there’s gonna be a Wisconsin currency and there’s gonna be an Illinois currency, and that’s just gonna be very difficult to transact between. I also have, if I’m sitting in Illinois and I take that currency, if I wanna go get the gold and silver that’s supposed to be backing that currency, I gotta go to Wisconsin. So interstate commerce becomes really difficult when you don’t have a national system. And during this time it was kind of the Wild West of banking. And you can see that when we do have registers of when banks opened and when banks closed because the states were now dealing with it. And the average lifespan of a bank was about five years.
[00:21:08] So now, go back to that Jackson land deal gone bad. If you’re doing business in this currency for this local bank and that’s where the gold is because remember, they’re issuing notes against a held gold reserves and they’re held where? At that actual bank. Now, if that bank goes under, my notes that I thought were worth some silver and gold are now only worth the paper they’re printed on. So this makes doing business there’s a lot of fear. When we go into the store today, ladies and gentlemen, we have a National Banking System now. And so, you don’t think about it. If you cross state lines, you don’t think about it. A dollar is a dollar is a dollar. That’s the way we’ve come to think about this. What if it wasn’t? That’s what was happening between 1841 and 1863. There’s no national currency until the Civil War with the National Banking Act signed by Abraham Lincoln in 1863. And what it did is it created a National Banking System, and that National Banking System was banks that you could transact in across the entire United States.
[00:22:12] So now, go back to my example. I’m sitting in Milwaukee, Wisconsin. I wanna do a deal in Chicago, Illinois. I take my national currency now issued by my National Bank of Wisconsin, right? I go down to Illinois. I exchange them for the good or service that I went to Chicago for. Now, that person has my currency from the National Bank of Wisconsin, which is the same currency that’s accepted by the National Bank of Illinois. This suddenly makes interstate commerce really, really easy compared to the old system, which is really good if you’re fighting a civil war across a whole bunch of states and you have to move goods and services all over the place. Because that’s exactly why they passed that Act. What this actually did, those national banks, they weren’t backed by gold and silver. They were backed by US Treasury Securities or T-bonds or, to put it in another way, US government debt. And this then created the dual system of federal and state banks that is unique to the United States. There is nowhere else in the world where you have these small, local state banks running and operating right alongside a national bank that operates at a federal level.
[00:23:21] And so, like just stop and think about what bank you’re banking at. When I lived in Arizona, I had two bank accounts: one at the Arizona State Credit Union and the other one at the National Bank of Arizona. One was a local bank that was local to the state. The other one was a national bank. Because the people who backed the National Bank of Arizona was the Zions Bank, which operates in Utah, in Colorado, in Arizona, and a bunch of other states. They’re part of the National Banking System. That’s unique.
[00:23:49] And it’s also during this period of time, prior to 1863, prior to the Civil War, when people outside the United States refer to the United States as doing anything, they would say that the United States “are.” The United States “are” going to war. The United States “are” purchasing Louisiana. Plural. That’s the point. Plural. But after the establishment of the National Banking System and after the end of the Civil War, people outside the United States started saying that the United States “is.” The United States “is” going to war. The United States “is” engaged in interstate commerce or international trade. The United States “is.” Singular. One nation bound by a banking system.
[00:24:36] And that, ladies and gentlemen, is why all of this matters at the end of the day. The money in the economy is what actually binds a lot of us together because, at the end of the day, we can argue over red states and blue states, we can argue over definitions, but my money spends just as good as yours. And we’re all bound in one economy that functions across the entire United States. My money will spend just as well in Colorado as it will in Wisconsin as it will in Texas as it will in Arizona. In fact, because we’re the United States, it will spend pretty well overseas, too.
[00:25:10] But when you stop and think about the US Federal Reserve, it’s worthwhile for us to know the history of this because the Fed has $9 trillion worth of assets. That’s the firepower equivalent to most nations’ GDP. $9 trillion is greater than the economies of Germany and Japan combined. And for all their power, and for all this stuff with the Fed, for all the decisions they make about interest rates, about employment, about monetary policy, they still don’t have a God-like level of power. Because right now we might have 40-year-high inflation, but it’s hard to say that without pointing out that it’s 50-year-high on profit margins and rents. The Fed can cut demand via monetary policy by jacking interest rates, but it can’t remove the liquidity — that would require us raising taxes at a high level — or to stop price gouging — that would be a windfall tax against corporations.
[00:26:05] And this is where the power of the Fed starts impacting Main Street, ladies and gentlemen. It has a direct contact with our life on a day-to-day basis, from our jobs to the prices in the grocery store to the interest we pay, earn our credit cards, student loans, car loans, and mortgages. And when we find ourselves in tough economic times, when we have high rates of inflations, when our economy is not humming along the way that we all we wish it was, when we’re not all sharing equally in the pie, we start to hear the Jeffersonian and Jacksonian oppositions, the same arguments, the same objections, the same worries and concerns: government tyranny, consolidation of wealth and power, trampling on the little guy. Everybody from Donald Trump to Occupy Wall Street more or less vocalized the exact same concern. They were right out of the mouths of Thomas Jefferson and Andrew Jackson, ladies and gentlemen.
[00:27:00] And we have two great examples of what happens when we end the Fed as advocated by people like Ron Paul. We saw what happened after the abolition of the First Bank of the United States. Local banks did what was in local banks’ interest, caught triggering high inflation. We abolished the Second Bank in 1841 and what happened? Immediately triggered a recession. So there’s no easy solutions to this, but it’s worth for us, in order to take control of our financial lives, we need to understand the system we’re playing with and we need to also take an active role to answer the question of who the banks should actually serve, not who they really serve, but who they should serve, how they should be regulated, who should be looking over their shoulder. How do we ensure that they’re not doing games with the economy? And who holds the bag when it all breaks? Who gets the bailouts? The banks, Wall Street, or Main Street? And that’s certainly an open question that we’re still debating today. And for my money, ladies and gentlemen, I think the personalities are just as big, just as outrageous, and just as interesting to watch.
[00:28:09] Thanks for listening, ladies and gentlemen. I have a goal that I wanna get my Instagram following above 200 followers. So please go to Instagram and find me @fiscallysavage and give me a follow, maybe share my profile or some of the pictures, videos, reels, and stuff that I have up on that right now with a friend, somebody who’d like to hear a message. Once I hit 200, ladies and gentlemen, I’m going to be putting up a “ask me anything” prompt for you to be able to submit questions to the show where I’ll answer on one of these Friday shows. And I would love to be able to open up that dialogue and have that one-on-one communication with you and be able to keep this conversation going as we take control of our financial lives and live free.
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