(October 29, 2019) Provided below is an article I wrote for American Spectator today about the origins of a symbiotic relationship between the U. S. Treasury and the banking industry that is forever fueling the growth of our national debt. It all began with the 1863 National Banking Act used to fund the Civil War.
A decade after the 2008 taxpayer bailout, Americans remained skeptical of banks. According to a 2018 survey, one-third of the public had “hardly any confidence in bank leaders” as compared to 10% before the bailout. In reality, the rescue was merely one symptom of a protracted alliance between banks and the federal government. It dated from the 1863 National Banking Act during the Civil War. Since nobody alive today can recall a time before the alliance was operative, a review banking theory will help illuminate its flaws.
Banking evolved among merchants in the mid-seventeenth century when shopkeepers normally stored their surplus gold in the King’s mint. But King Charles I temporarily confiscated the gold in 1638 to finance the English Civil War. Although the merchants were eventually repaid, they ever after preferred to deposit their gold with private goldsmiths who issued warehouse receipts to each depositor. Such receipts essentially became paper money and were preferred in many transactions in place of bulky coins. Even though the currency was paper, it could be redeemed on demand at the goldsmith for gold.
Soon the smiths realized that most of their receipts would remain in circulation and rarely be presented for redemption. Therefore, they could lend money in the form of newly issued receipts maintaining a gold inventory equal to only a fraction of the face value of receipts outstanding. As long as the receipts presented for redemption never exceeded the smith’s gold inventory, there was no harm. But if ever a holder presented a receipt that could not be redeemed in gold, public confidence in the smith’s receipts would vanish and the paper would no longer be accepted in transactions, except perhaps at a discount.
Learn more about the Civil War by reading:
The Confederacy at Flood Tide by Philip Leigh
Lee’s Lost Dispatch & Other Civil War Controversies by Philip Leigh