A Perpetual Unholy Alliance

A Perpetual Unholy Alliance

(July 27, 2021) In English-speaking countries, banking evolved among merchants in the mid-seventeenth century. Shopkeepers normally stored their surplus gold in the king’s mint for safekeeping, until Charles I needed money shortly before the English Civil War in 1638. He confiscated much of the merchants’ gold, calling it a loan. Although it was eventually repaid, merchants thereafter preferred to deposit their gold with private goldsmiths who issued warehouse receipts to each depositor. Such receipts basically became paper money and were preferred in many transactions in place of bulky coins.

Soon goldsmiths 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. Theoretically, once such loans were repaid, the amount of receipts remaining in circulation would equal the gold inventory, and the smith would have earned interest income on the loan. Pragmatically speaking, however, new loans were constantly created as old ones were paid off. 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 warehouse receipts would vanish, and the paper would no longer be accepted in transactions, except perhaps at a discount to face value.

At the start of the American Civil War, about 1600 banks operated in the above manner. There were no federal minimum reserve requirements. Regulations regarding reserve ratios, interest rates, and loan activities were set by the states individually. The nation’s total currency was about $450 million, of which only $250 million was specie, meaning gold or silver coins. The remaining $200 million was composed of various private paper issues, meaning banknotes.

The enormous Civil War financing needs impelled changes to the monetary system, as federal spending grew from $80 million in fiscal year 1861 to $1.3 billion in 1865. During the war, the federal debt similarly leaped from $65 million to $2.7 billion. 

The first legislated monetary change was the 1862 Legal Tender Act, which authorized greenbacks. Although greenbacks were not redeemable in specie, the federal government tried to mandate their acceptance by declaring the bills to be “legal tender for all debts, public and private.” Soldiers and government employees, for example, were paid in greenbacks. It soon became the standard currency, except for imports which still had to be paid for in gold. 

The second change was the 1863 National Bank Act, which provided incentives for state banks to seek national charters. Specifically, it enabled such banks to use government bonds as reserves instead of gold. Thus, the arrangement enabled the bankers to earn interest income twice from a fixed amount of invested capital. One source was the bank’s borrowers, who paid interest on their borrowings. The other source was the federal Treasury, which paid the interest on the bonds. That lucrative arrangement remains in place to this very day. That is why banks are ever ready buyers of government bonds. 

For the last thirteen years, however, interest rates have been near zero. Thus, banks are more prone to sell the bonds they buy from the Treasury. The trick to keeping the Ponzi scheme going is to find a buyer to buy the bonds from the banks at higher prices so that the banks may record a profit to their shareholders. There needs to be a sucker buyer. That’s where the Federal Reserve Bank steps in with a program called Quantitative Easing. Basically, the Federal Reserve stands ready to buy the bonds from the banks at prices that enable the banks to record a profit. Since the Federal Reserve is merely another branch of the Federal Government, the scheme basically rewards commercial banks to act a middle-men in order to disguise the fact that one branch of the government is merely buying the bonds from another branch. The Federal Reserve is essentially buying from the U. S. Treasury.

Since there is no independent buyer for the bonds, Quantitative Easing is merely another type of Ponzi scheme. Thus, the game that the 1863 National Banking Act started, may not really be perpetual. In may ultimately end catastrophically.  

2 thoughts on “A Perpetual Unholy Alliance

  1. Christopher K Coleman

    I’m glad you are discussing the financing that lay behind the war; I think you are the only historian who has devoted any serious time or research into fiscal aspects of the war, which were far more important than most people realize. I commend you on that score. However, your comparison between Lincoln’s Civil War central banking program and the modern one is flawed.

    First off, what Lincoln did was put the banks under the thumb of the Federal government. If they wanted to issue bank notes he required they maintain a certain reserve, mainly in the form of Federal bonds and the Fed could inspect their books and punish accordingly for misdeeds. The modern Federal Reserve system, however, is just the opposite with the government enslaved to the Bankster. Just before World War I, the banksters secretly colluded with certain politicians to put the Federal money supply wholly in the hands of the banks. The Federal Reserve is NOT part of the Federal Government, still less part of the Treasury. The Fed is a PRIVATELY OWNED, FOR PROFIT organization, owned by a handful of mega banks, including the Rothschilds of London.

    This private organization controls the paper money supply and, since 1971, that money supply is backed up by NOTHING. In that year, Nixon, “temporarily” suspended the backing of the dollar by gold. Up until then, you could redeem your paper to the tune of $35 to the ounce. Go see how much an ounce will cost you today!

    FYI Lincoln was a big admirer of Pres. Andrew Jackson, who, you may recall, was the president who broke up the Bank of the United States, which was corrupting Congress and was secretly owned by Rothschilds Bank of London. Today, thanks in large part to the Federal Reserve’s malign influence, both parties serve Wall Street. not the people. Left and Right are convenient illusions to keep people believing that there is any real difference between the two parties.

    At the outbreak of the war, the Lincoln government went, hat in hand, to Rothschilds asking for a loan, but Lincoln balked when Rothschilds demanded 30% interest. That’s when Chase et al cooked up the fiat money scheme. Desperate for credit to run the war, Jeff Davis accepted the 30% interest in return for credit to buy arms and munitions. This is one reason (cotton being the other) why the English government was eager to join the war on the side of the Confederacy, regardless of Prince Albert’s influence on his wife or popular pressure to remain neutral. That Lord Palmerston didn’t overtly intervene was most likely due to the pressure from both the Prussian and Russian governments, who were both pro-American and pro-Lincoln in sentiment. In the middle of the war the Czar sent both the Baltic and the Pacific fleets on a “goodwill” visit to American waters. It was a not so subtle hint to the British and French not to directly intervene in the war. As it was, France & Britain did quite a lot to help the Confederate war effort.

    P.S. For anyone wanting to learn the unvarnished truth about the modern Federal Reserve, I recommend both the book and the documentary “The Creature From Jekyl Island.” I think the book is downloadable for free and the doc is available online for free as well.

    1. Phil Leigh Post author


      1. United States Gold Certificates could not be redeemed for gold since Franklin Roosevelt’s first administration. Thereafter, the only holders who could demand gold for such certificates were foreign nations. In 1971 Nixon suspended that feature.

      2. Prior to the Civil War banks had their own reserve standards, which were regulated only by the states. The best banks retained generous reserves of gold in order to be able to redeem their banknotes in gold. Paper money in those days were typically the banknotes of individual banks. There were not Greenbacks that still exist in the form of “United States Banknote” as opposed to “Federal Reserve Banknote.” The US Banknote typically has a read seal.

      3. Today, banks remain eager buyers of United States Treasury bills, notes, and bonds because they can all be counted as reserves. Until recently they all paid reasonable interest rates whereas any bank that held its reserves in the form of gold would receive no interest on those reserves. This relationship is between the banks and the Treasury, not the banks and the Federal Reserve. The Federal Reserve does not issue Treasury securities.

      4. Banks are audited by the Comptroller of the Currency which was set up by the Lincoln era National Banking Acts and the Comptroller is part of the U. S. Treasury not the Federal Reserve.


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