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Saturday, August 27, 2011

A Good Article On Pre-1913 Banking And Money

This article has a very nice summary of banking laws before 1913. Summarizing, it was not a free market. There were many laws that explicitly encouraged fraud.

Here are some highlights.

Before the Civil War and the National Bank Act, banking was still regulated at the state level, even though Andrew Jackson vetoed the renewal of the 2nd central bank.

In many states, bank charters were specifically allocated by the legislature. You could not open a new bank unless you got the legislature to pass a law allowing it! That's a neat barrier to entry.

In many states, banks were allowed to issue paper banknotes. They were required to invest in state bonds as collateral. This artificially inflated the price of state bonds.

The law explicitly encouraged banks to make lots of paper banknotes and then declare bankruptcy, "wildcat banks".

The National Bank Act in the Civil War placed a 10% tax on state banknotes, effectively making them illegal. A system of Federal banknotes were established. Banknotes were issued by the banks and not the government. It wasn't until the Federal Reserve in 1913 that banknotes were issued by the government.

Banks were required to invest in Treasury debt, using that as collateral for banknotes. This led to the perverse circumstance that, if the national debt were repaid, then banks couldn't issue banknotes!

The law explicitly allowed for various levels of pyramiding paper on top of gold. Larger banks were allowed to use more aggressive leverage ratios. This naturally led to periodic bank runs.

Under the National Bank Act, there was a hybrid system of gold coins, US Notes, and bank-issued banknotes. US Notes were not gold-redeemable, but there were legal tender laws. Banknotes were redeemable in gold, BUT banks had a tendency to declare bankruptcy and default.

There was an experiment with a bimetallic standard near the end of the nineteenth century. This was a failure, because the bimetallism law set the gold:silver ratio artificially low, overvaluing silver and undervaluing gold.

There was *NEVER* a true free market banking system in the USA. There always were regulations at the state and/or Federal level.


LostPosterity said...

Read this book - Along with other information, it explains how the true Constitutional system was supposed to work. It was based on honest weights and measures of copper, silver and gold. This book was a best seller - second only to the Bible in it's day. The ideas in it literally preserved our nation's liberty for quite a few more decades. Now very few people have even heard of it.

This guy wrote another book called 'The Book' just after the Fed was set up. It predicted everything that has happened today and explains more about the Fed - If you can find a copy, buy it.

I think you will find the part in the book above about supply and demand as it relates to the US Mint and the US Government interesting. It is sad this bit of wisdom is no longer taught in our schools.

In the Constitutional system, all free people shared common mints, assay offices, etc. Just as any king would have a mint, etc, all of the free people in America shared the mint. We could also hold the office and receive it's emoluments if we desired. Same with any other officers that a King would normally have. For instance, we shared a county (or town) sheriff, a county recorder of our deeds, etc. Some of these offices still exist today, in fact all of them probably do.

Another interesting speech about this period of history can be found here;

here is a copy of the original Congressional record that speech came from.

When you finally grasp what really has happened, it is pretty amazing. The old system was far, far, better..for the good guys and the bad guys. Truly brilliant and very simple. How it was set up is all there in history. It should be restored. It would create prosperity again and our other problems would be solved in short order. Here is one more video for you since you seem to be searching for truth. This guy may not be right on everything and he might be a bit abarasive but he has done a lot of actual searching for the truth - once you get past the sermon..he will get to the good stuff. I enjoy your writing.

Scott said...

Thanks a bunch for the link to that book. I thought I knew everything about all this and it was quite a revelation, and some of it different from claims made by just about everybody on both sides of the modern debate. Such as that the US was always on the silver standard and never was on the gold standard. It is extremely interesting that people falsely claim otherwise nowadays.

I also found the format of the book, as an illustrated children's book, and a Socratic dialog, to be quite educational as regards what makes a smooth read.

LostPosterity said...

"All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation."

-John Adams

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