With the Central Bank killed off, fractional reserve banking moved like a virus through numerous state-chartered banks instead causing the instability this form of economics thrived on. When people lose their homes someone else wins them for a fraction of their worth. Depression is good news to the lender; but war causes even more debt and dependency than anything else, so if the banks couldn't have their Central Bank with a license to print money, a war it would have to be. We can see from this quote of the then chancellor of Germany that slavery was not the only cause for the American Civil War. "The division of the United States into federations of equal force was decided long before the Civil War by the high financial powers of Europe.
These bankers were afraid that the US, if they remained as one block, and as one nation, would attain economic and financial independence, which would upset their financial domination over the world."
Unlike today, when the Federal Reserve System can increase or decrease the money supply in response to perceived economic needs through such mechanisms as changes to mandatory bank reserve requirements or changes in interest rate policies, there was little to no central management or intervention possible through techniques that while today subject to vigorous political debate, are nonetheless largely accepted practice in our political and economic system.
Wars are expensive. It takes money to wage successfully and require a marshaling of resources to defend the political system under armed attack. Weapons and munitions need to be purchased in large quantities. Naval forces need to be augmented. Such seemingly mundane actions as clothing and feeding large numbers of men enlisted for the defense effort need to be attended to. All these activities and functions take a considerable amount of money.
On the eve of the Civil War on April 12, 1861, the financial and banking system in the United States bore little resemblance to current institutions and practices. There was no central bank. The Federal Reserve System had yet to come into existence. Banking was largely a state regulated function. Money consisted of a myriad of private bank issues of paper money, as well as merchant scrip and, at the core of the monetary system, coins issued by the federal government whose value in commerce was predicated on and closely related to its inherent metallic value.
On February 25, 1863, President Lincoln signed what was known as the National Currency Act. The system was quite simple. A federally chartered bank would purchase federal government bonds and leave them on deposit with the Treasury Department. This resulted in a temporary decrease in local area capital in the area of the bank and an increase in capital available for the federal government. Money that had yesterday been available to finance commercial needs in Belleville, or Chicago, Illinois or Omaha, Nebraska was now in Washington, D.C.
Under its provisions a system was established under which the federal government issued charters – essentially a grant of authority to operate under the newly established national bank system — to banks that agreed to meet certain capital and other regulatory requirements. One of the central features of the March 3, 1863 National Currency Act was a provision under which federally charted banks participating in the system were able to purchase federal government bonds – as actually any individual or institution could – but the federally chartered banks could then issue their own money, what was call "National Bank Notes," that constituted obligations of the federal government and would be redeemed by the government itself in the event of a bank failure. The security for this pledge was the value of the federal bonds purchased by the issuing bank, which was authorized to print National Bank Notes up to 90% of the value of the federal securities left on deposit with the government as security to back the bank issues.
When Lincoln asked Colonel Taylor if the people of America would accept the notes, Taylor said. "The people or anyone else will not have any choice in the matter, if you make them full legal tender. They will have the full sanction of the government and be just as good as any money; as Congress is given that express right by the Constitution."
Lincoln agreed to try this solution and printed 450 million dollars worth of the new bills using green ink on the back to distinguish them from other notes.
|Issued on March 10, 1862 with the image of current President Lincoln on this $10 bill.|
"This note is a legal tender for all debts, public and private, except duties on imports and interest on the public debt, and is receivable in payment of all loans made to the United States."
"The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers... The privilege of creating and issuing money is not only the supreme prerogative of Government, but it is the Government's greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform currency medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges. The financing of all public enterprises, the maintenance of stable government and ordered progress, and the conduct of the Treasury will become matters of practical administration. The people can and will be furnished with a currency as safe as their own government. Money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power."
"If this mischievous financial policy, which has its origin in North America, shall become endurated down to a fixture, then that Government will furnish its own money without cost. It will pay off debts and be without debt. It will have all the money necessary to carry on its commerce. It will become prosperous without precedent in the history of the world. The brains, and wealth of all countries will go to North America. That country must be destroyed or it will destroy every monarchy on the globe."The American economy has been based on government debt since 1864 and it is locked into this system. Talk of paying off the debt without first reforming the banking system is just talk and a complete impossibility. That same year Lincoln had a pleasant surprise. Turns out the Tsar of Russia, Alexander II, was well aware of the banks scam. The Tsar was refusing to allow them to set up a central bank in Russia.
Under the system originally established by the Act of March 3, 1863, 14,348 charter numbers were issued to qualifying banks. Although the system was statutorily modified from time to time, the essential element, i.e. a money issuing privilege granted to participating institutions related to the value of their underlying purchases of federal debt obligations remained largely unchanged. One significant modification was the Aldrich-Vreeland Act of May 30, 1908, which permitted banks to issue on the basis of other securities left on deposit in addition to federal government debt obligations. This modification was occasioned by needs to increase the money supply in response to the economic contraction attendant on the Panic of 1907. The “other securities” privilege expired in 1915.
In excess of 12,000 individual banks took advantage of the issuing privilege prior to the end of the National Bank Note era on August 1, 1935, when the last bonds authorized to support the issue of what are called “Nationals” by collectors, were called for redemption.
Abraham Lincoln on Banking, in his own words.
1.) Speech Concerning the State Bank, January 11, 1837. In this, his first published speech, Lincoln argued from the floor of the Illinois House of Representatives against a motion to “investigate” the State Bank of Illinois as a prelude to killing it – much as President Andrew Jackson had killed the second Bank of the United States, another joint public-private venture. In his speech, Lincoln defended both institutions, expressing his core conviction that strong banks and a reliable, flexible currency, preferably under Federal organization and supervision, were essential to economic opportunity.
“I make the assertion boldly, and without fear of contradiction, that no man... has ever found any fault with the Bank. It has doubled the prices of the products of their farms, and filled their pockets with a sound circulating medium, and they are all well pleased with its operations.”
“The [National] Bank was permitted to, and did actually loan [public revenues] out to individuals, and hence the large amount of money annually collected for revenue purposes, which by any other plan would have been idle a great portion of time, was kept almost constantly in circulation. Any person... will reflect, that money is only valuable while in circulation, [and] any device which will keep the government revenues, in constant circulation, instead of being locked up in idleness, is no inconsiderable advantage.3.) Address to the People of Illinois, March 4, 1843 While Lincoln’s Whigs had won the White House in 1840, they went down to defeat in Illinois, owing in part to the lingering effects of the economic downturn in 1837. Seeking to regroup, the party leadership called on Lincoln to formulate a statement of principles easily understood by the public. One of those resolutions concerned banking.
By [contrast, under] the Sub-Treasury, the revenue is to be collected, and kept in iron boxes until the government wants it for disbursement, thus robbing the people of the use of it, while the government does not itself need it, and while the money is performing no nobler office than that of rusting in iron boxes. The natural effect of this change of policy, everyone will see, is to reduce the quantity of money in circulation... [resulting in] distress, ruin, bankruptcy, and beggary.
We do not pretend, that a National Bank can establish and maintain a sound and uniform state of currency in the country, in spite of the National Government, but we do say, that it has established and maintained such a currency, and can do it again, by the aid of that Government, and we further say that no duty is more imperative on that Government, than the duty it owes the people, of furnishing them a sound and uniform currency."
"The third resolution declares the necessity and propriety of a National Bank.... The first National Bank was established chiefly by the same men who formed the constitution, at a time when that instrument was but two years old, receiving the sanction, of the immortal [President[ Washington. [T]he second [national bank] received the sanction of [President] Madison, [holder of] the proud title of ``Father of the Constitution;" and subsequently the sanction of the Supreme Court, the most enlightened judicial tribunal in the world.As a wartime president, Lincoln focused on his role as commander-in-chief, leaving most non-military decisions to the discretion of Congress. On the handful of domestic issues that really mattered to him, however, Lincoln provided determined leadership. A safe and sound national banking system and a reliable national currency were among those issues, as he said in a message to Congress from 1862.
Upon the question of the expediency, we only ask you to examine the history of the times, during the existence of the two Banks, and compare those times with the miserable present.”
"... it is peculiarly the duty of the national government to secure to the people a sound circulating medium... furnish[ing] to the people a currency as safe as their own government."For Lincoln, as he told a confidant, the creation of a national banking system was a “special interest” – special enough for him to bend every effort to persuade Congress to pass the founding legislation prepared by Treasury Secretary Salmon P. Chase. The President thus took great satisfaction in signing into law the National Currency Act, which created the national banking system and the Office of the Comptroller of the Currency as its supervisor. Although promoted partly as a wartime measure (the new national banks were required to purchase government bonds as security for the bank notes they issued), Lincoln, in his message to Congress of December 1864, left no doubt that his intention was to create a system that would serve the country long into the future.
The national banking system is proving to be acceptable to capitalists and to the people... That the government and the people will derive great benefit from this change in the banking systems of the country can hardly be questioned. The national system will create a reliable and permanent influence in support of the national credit, and protect the people against losses in the use of paper money.
Compiled by Neil Gale, Ph.D.