It Is Dangerous to Be Right When the Government Is Wrong - Andrew P. Napolitano [118]
I Now Pronounce You Bank and State
Kings and governments saw great opportunity with this system, however, since it created an institution that could provide massive funding for projects and wars which would in turn expand their empires and power. Thus, government-sponsored fractional reserve banking was born. Since government-chartered (authorized) banks were able to loan out more currency than they had in their vaults as reserves (just as the goldsmiths had done), there still remained a possibility of a bank run. In an attempt to mitigate this possibility, the government created a lender of last resort: A government-sponsored, and privately owned, central bank, that would control the issuance of all currency within the nation. If banks suffered a run, they could always turn to the central bank for immediate loans to keep them in business. In other words, this system of central banking “propped up” the fraud highlighted above.
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Like any action which possesses the capacity to violate the Natural Law, this power should never have been given to a person, institution, or government. The famous rags-to-riches banker Mayer Amschel Rothschild reflected on this power: “Let me issue and control a nation’s money and I care not who writes the laws.” Thomas Jefferson expressed his own concerns for a central banking system (and a prescient anticipation of our present woes) which printed and loaned money to the government: “And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money [today] to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Jefferson understood that the Natural Law can be violated not just with guns, steel, and fire, but also with the printing of money.
The first central bank in America, the First Bank of the United States, was chartered to pay off the debts that accrued from the Revolutionary War. This bank spread the debt evenly among the colonies, and was relatively small, controlling only about 20 percent of the nation’s money supply. Jefferson, however, was not fooled into believing the bank’s influence would remain this small, and while president wisely allowed the bank’s charter to expire.
The Second Bank of the United States was chartered five years later in 1816 by Congress and signed into law by President James Madison. This second bank’s life only lasted until 1833, when President Andrew Jackson allowed the charter to expire after a bank panic. Jackson faced the hard decision of letting banking institutions fail, causing unemployment in the short term, or bailing them out with the central bank system, causing erosion in the value of the nation’s currency in the long term. He explained to the managers of the bank:
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Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.2 (Emphases in original)
President Jackson expressed concerns about banks funded by a central bank because bankers would have an incentive to take as much risk as possible, sharing the profits amongst themselves, and the losses amongst the taxpayers as the ultimate lender of last resort. The future of this country would be brighter had all presidents since Andrew Jackson possessed both his understanding of the dangers of “too big to fail” and his personal courage necessary to resist its temptations.
State-sponsored Moral Hazard
To illustrate President Jackson’s fears, as relevant today as ever, take, for example, the real estate boom and bust during which banks were making massive profits from extremely risky lending