Economic Cycles Before the Fed | Thomas E Woods, Jr.



our first speaker this morning is dr. Thomas woods who is a senior fellow here at the Ludwig von Mises Institute and it is the topic of his lecture this morning is going to be on economic cycles before the Fed Tom okay first of all when we talk about nineteenth-century American history particularly the first half of the century but really all throughout we have to content ourselves by and large with qualitative statements about the economy because the statistics such as they are are either unreliable or non-existent in many cases so I won't be citing a lot of statistics but nevertheless I think we can we can make some judgments several years ago I published an article in the quarterly journal of Austrian economics called what Austrian economics can teach historians history is actually my field all my degrees are in history I don't have any degrees in economics I've just been studying it since I attended Mises University some years ago and in that article one of the points I made was that the historian who has some knowledge of the Austrian school has an advantage over his peers in many ways and that one of those ways is that when studying economic cycles he has the benefit of the Austrian theory of the business cycle so in effect he knows what to look for he knows to look for credit expansion and that's what I'm suggesting we do in the case of the nineteenth century because very often when you're talking about the Federal Reserve System a critic will reply that indeed we had booms and busts before we had a Federal Reserve System so doesn't that invalidate your case if you're blaming everything on Alan Greenspan I mean really can you blame Alan Greenspan for the panic of 1819 you could try I suppose but I think it's better to suggest that really the same phenomenon is at work in both cases that these these panics are not any sort of difficulty for our position I a lot of work remains to be done on them from an Austrian perspective though and at the end I'm going to refer you to some resources where you can indeed get yourself up to speed on where we stand in our knowledge of these episodes if you decide in fact to take this up for yourselves now Murray Rothbard of course wrote a book called the panic of 1819 reactions and policies that was published in 1962 by Columbia University Press that was far and away Roth bards most critically well-received book if you read the major historical and economic journals they are full of praise for this book and indeed a recent track suppose not super recent but a book I read in grad school about jacksonian america obviously Jacksonian America's a little bit after the panic of 1819 but nevertheless in the bibliography the bibliographical essay the author Harry Watson I think says Murray Rothbard x' book the panic of 1819 is unlikely to be superseded as a completely mainstream treatment of the subject saying that about the Rothbart book so that means something this is this is a real piece of scholarship it's very well done it's a model for how to do something like this but Roth bards initial idea when he set out to work on this project for his doctoral dissertation was not to confine himself to the panic of 1819 but to do a study of American business cycles then he gets started on it realized well that's obviously impossible in a dissertation so it's very much like when he started to write his history of economic thought forget ok I'll write a 300 page history of economic thought and then he realized oh my gosh there's so much to say or I'm going to write a history of the US and four volumes later he's just finishing the colonial period so that's what happened with the panic of 1819 but it's very well done in the Institute reprinted it and to our amazement it's sold pretty well for a book from 1960 to about a panic nearly to nearly 200 years ago so very significant so it's a great analysis and at the end he's evaluating front responses to the panic and what people proposed and although the responses are all over the map what's significant to me is that there was a substantial hard-money contingent that drew hard money conclusions from the panic of 1819 well I want to start a little bit before even this and say a little something about the initial purposes of national banks that were chartered by the US government because I want to make clear that the the what's called the First Bank of the United States that was chartered in 1791 or the second bank of the United States that was chartered in 1816 these are not exact they may be forerunners of the Fed but they're not they're not really central banks in the in the traditional sense of the term because their functions and their powers were much more modest so these banks would lend to the US government typical government central bank relationship they would serve as a depository of the federal government's funds and they would issue their own notes now they did not have a monopoly of the note issue so other banks could issue their own notes but the notes of the National Bank had a certain prestige because everybody knew that federal government deposited its money there that that gave people the sense that there was a certain stability to it it enjoyed a federal Charter and these notes were also receivable in taxes so that gave them a sort of quasi legal tender status that that gave them an advantage that other banks notes did not did not enjoy now the First Bank the United States 1791 came about as the result of really what was the first major constitutional dispute in US history because the dispute was about whether the federal government had the authority to establish a National Bank to begin with and of course this dispute involves Secretary of State Thomas Jefferson on opposing sides from Secretary of the Treasury Alexander Hamilton now the argument is fairly straight forward to Jefferson's view was that such a Bank is neither constitutionally authorized nor necessary where's Hamilton's view was that it's boat it is both constitutionally authorized and necessary but Jefferson anytime you're dealing with a historical figure like Jefferson or Andrew Jackson or anybody else who was opposed to a National Bank historians are going to treat them like ignorant country bumpkins and you might treat with a kind of condescending sneer if only they hadn't been such stupid ignorant Hicks they would have understood the value of a National Bank you know too bad Jefferson was so stupid and wasn't informed enough to the contrary Jefferson understood these issues and was much more informed about economic and financial issues than the much-vaunted Alexander Hamilton and his view was that there's really no reason that banking can't just function like any other business right why we need to have some federally chartered National Bank why can't it just be a bunch of banks providing money warehousing and financial intermediation services what what would be wrong with that why does there need to be this special privilege given and Jefferson's main argument was there's no Express delegation of this authority to the federal government in the Constitution so unless we're just going to start down a road in which we have a blank piece of paper for a constitution we have to make a stand here and say no you can't have it a Hamilton on the other hand said that Jefferson's interpretation was was certainly unreasonable much too narrow that in fact a National Bank was necessary and that indeed it was implied in other powers granted to the federal government and so it ought to be instituted and we should have no moral or constitutional scruples about doing so well George Washington of course was president at the time and poor George Washington I mean I think I know Rothbart is not too pleased with Washington in terms of his military capabilities and that's a separate matter but I do think one can credit Washington with not having staged a military coup after the war was over I mean they're up there were military and political figures around the world who were astonished at that so I do recognize that one thing of Washington but poor Washington really does not have much of an opinion on this National Bank so he more or less takes the opinion of whoever was the last person to talk to him that's the position that he takes and then finally he came to conclusion well this is more or less Alexander Hamilton's area right I mean he is the secretary of the Treasury so I'm going to defer to his judgment and they went ahead and established a national day so that Bank had a 20-year Charter which expired and was not renewed in 1811 now at the time at that Bank his charter was not renewed there were the usual suspects that we would have today imagine the Federal Reserve were about to be abolished what would we hear oh this is going to lead to just terror in the financial markets a contraction of credit devastation throughout the land and so on that's what we heard in 1811 economy's going to crash going to be the biggest disaster ever and get a contemporary noted in 1816 many persons viewed a dissolution of the late Bank of the United States as a national calamity it was asserted that a general bankruptcy must follow that event the fact was otherwise every branch of Industry continued uninterrupted no failures in the mercantile community were attributable to that occurrence well of course 1811 is one year before 1812 and the war of 1812 that war was between the United States and Britain involved some long-standing grievances the u.s. had against Britain James Madison was president at the time took this war very seriously and one day when a British journalist happened to be within earshot of the president he asked him what do your fellow countrymen in Britain think about this war they're engaged in with the US and this journalist barely had the heart to tell Madison that most Britons were not even aware they were at war with the United States it was so trivial to them they weren't even aware that it's going on and for Madison like this is my destiny in history to be waging this thing but notice now that was that war goes on there's no National Bank it went out of existence the previous year and the banks in New England are not willing to lend to the US government for war purposes the New England they're all dead set against this war they in calling in mr. Madison's war partway through the war most of the way through the war some people in New England began agitating for an amendment to the Constitution that would require a two-thirds majority for a declaration of war to make sure that we don't find ourselves in situations in which the country has been led into war with a substantial minority opposed so what wound up happening and this is what Rothbard told us when I was at Mises you years ago he gave the opening lecture one night he was talking about the history of American business cycles and he and he told us I i'm the world's foremost expert in the panic of 1819 is this I'm the only one who's written a book on so I thought all right fair enough I guess for him to say that but he said that what basically happened was that then other banks in other parts of the country sprang up he said these were banks that had no money in his bank it was going to issue paper and this this led to of course problems so after the war there was some agitation among the political class for another National Bank you know we need to have this institution it's nice to have an institution that more or less will be counted on can be counted on to lend to the US government so that's what we got second bank of the United States 1816 but then three years later we get the panic of 1819 now are these things entirely unrelated or could there be some some connection well it turns out that the Bank of the United States did indeed engage in what we would call an inflationary boom the first couple of years of its existence and the other banks did as well now why are these banks engaged in and not just a ton of the National Bank right now leave that aside for a moment but how come all just the whole run the general run of banks why are they engaging in artificial credit expansion why are they issuing more notes than they have precious metals in the vault to back them or how do they feel like they can get away with this and the answer is that with the passage of time a precedent began to be established that if a bank or particularly if there's a series of banks if there's a big problem a panic find themselves in difficulties where they can't meet their depositors demand well then they could do what was called suspend species species just a word for the the precious-metal trickly the precious metal coins they could legitimately they could legally refuse to honor their depositors request for withdrawal they could say you know well look we haven't got the money maybe we'll have it in six months maybe a year check back with check back with us two years from now maybe we'll try and get you your money well this obviously is a kind of subsidy to this behavior because if if they're not required to close their doors when they can't deliver their depositors money then it encourages them to do more of this to take more risks in the expectation of additional profit with the downside being more or less socialized through this kind of special privilege well as we'll see in later years there were proposals that the banks if they're going to get state charters which indeed that the banks did have to get state charters that one of the provisions of those charters ought to be that at the first moment that you are unable to satisfy your depositors request for withdrawal you ought to be you ought to be closed that that comes later so this is a special privilege that the banks enjoy now I'm going to talk in a few minutes about some people in US history who kind of understood what was going on both in the panic of 1819 and the panic of 1837 they understood what the correct narrative was who the culprit was what the economic phenomena at work were and this is particularly noteworthy because as I say historians portray these people as stupid Hicks almost by definition you're a stupid hick if you're against the National Bank now and then when I come back and say but they did understand economics actually to a degree that I think we have no right to expect even then in effect the next argument sort of becomes but if they favor a hard money approach if they favor a kind of a gold standard and and no creation of fiduciary media that by definition makes them stupid Hicks because don't you know that we need paper money and all the cool kids are doing that so it's very hard to win this argument with mainstream historians but who even cares I mean outside mainstream historians don't know anything about economics I'm worth arguing with that we would want to reach the general public and leave the historians where they are but one of the people I'm going to introduce to you at greater length in a few minutes is a New York editorial writer named William Leggett le Jie GE TT Leggett was a Jacksonian he was a great exponent of the Jacksonian philosophy and he wrote of the panic of 1819 he said for the two or three years preceding the extensive and heavy calamities of 1819 the United States Bank poured out its issues that is its issue of banknotes at such a lavish rate that trade and speculation were excited in a preternatural manner well the lessons of the panic of 1819 that many people drew at the time was that the economy gets taken on a wild and unhealthy ride when the money supply is dramatically and artificially increased and then suddenly just as suddenly reduced so even the political class managed to figure this out some of them anyway so there were some American statesmen and thinkers who were confirmed in their existing hard money views by the episode of the panic of 1819 where an inflationary boom was followed by a terrible bust so Thomas Jefferson asked a friend in the Virginia legislature to introduce his plan for it was called a plan for reducing the circulating medium you imagine somebody introducing that plan today I want to reduce the money supply that was a great thing about mark Thornton's article on the debt ceiling his article was called lower the debt ceiling I thought yeah good old Mises Institute always count on this a the exact opposite of what but not just hold the line reduce the darn debt ceiling so Jefferson want to reduce the circulating medium what his plan was was to over a period of five years reduce all it was to eliminate all paper money in excess of species so that from that moment on the paper money and the species would more or less be at a one-to-one ratio and then at that point just get rid of the paper money and just entire people have got to use the coins that was his proposal so there you are I mean you're in the company of a crazed lunatic like Thomas Jefferson how dare you have thoughts like this John Adams felt the same way Adams was very fond of a book called a treatise on the will bide astute to trust see he was a French chef theorist Adams called it the best book on economics ever written he said that the chapter on money quote defends the sentiments that I have entertained all my life times a very hard money book Jefferson wrote the preface to the english-language edition and I believe it is available at the mises.org and then other people so these are people who were sort of confirmed in their existing views other people were converted to the hard money caused by having observed firsthand what had overtaken the country when this great inflation of banknotes occurred and then the bus took place in 1819 so a guy named condi reggae and this guy's name is RA guet was an inflation Estelle spoken one until 1819 and then his mind was changed after the panic of 1819 and he went on to write a treatise on currency and banking in the late 1830s into 1840 and that's also available from the Mises Institute you can read it online just to see what hard money people were writing at that time these books that were written I mean that I could also mention a short history of money and banking by a guy named William Guge his book is also events in the bookstore and on mises.org these books actually still and more or less stood the test of time there's still very good treatises on these subjects and they the Googe book contains a lot of very useful US history history of money and banking so it's almost like you know the only good banking historian is a dead banking historian it seems like but we also have a Davy Crockett to future president William Henry Harrison and at least for a time John Quincy Adams who was also a president for a while who were also came out in opposition to inflation as banks in contrast to the inflationary second bank of the United States Adams proposed the hard money Bank of Amsterdam as a model the first treatise on economics published in America was thoughts on political economy by daniel raymond who was a disciple of Alexander Hamilton Hamilton was not a hundred percent reserve guy he did believe in fractional reserves and Raymond who very much admired Hamilton dissented from Hamilton on that point and advocated a hard money 100% Species Act currency so this is these are the sorts of lessons and policy proposals that are coming out of the panic of 1819 reggae actually proposed forfeiture of a bank's charter if they're if a banks notes or deposits were not redeemed on demand so that's example of what I was alluding to earlier also people had a kind of rudimentary some of them anyway economic view of monetary understanding of what was going on in the country how this this sequence of inflationary boom followed by bust took place what were the actual mechanisms of it and more or less what they what they concluded was that we had a bank credit inflation presided over and participated in by the Bank of the United States or we could call the second bank of the United States and the result of that was an increase in prices in the US when there's an increase in prices in the US people as you know these will be mechanisms that are quite familiar to you when there is that increase in US prices people are less likely to buy goods in the u.s. prices are gone up they're more likely to buy products outside the US so Americans are going to reduce their domestic purchases and increase their foreign purchases so when they do that and they begin purchasing things from abroad and importing more those people who are located abroad who are the sellers or who are the financial institutions they don't really want US banknotes that they don't circulate there so they're going to take those banknotes and return them to the US for redemption in two species and that's the moment where the banks would which have of course issued notes in excess species began to grow concern that they won't be able to meet their obligations and so they began contracting they call in loans and they diminish the number of loans they're going to initiate and this winds the whole cycle back down again and that's more or less how it how it occurs and so the conclusion from this was if we hadn't engaged in the inflation in the first place then we wouldn't have had to deal with this cyclical problem so I mean that's not quite the Austrian theory of the business cycle but you know for somebody riding in 1819 it's not totally stupid either and it's not an Americans didn't originate that that idea but a lot of them I think more or less developed it independently of the currents of economic thought existent at the time but what perhaps is the most memorable episode in US history in the 19th century and wait with regard to this comes a little later oh I do want to just share one quick thing before I move on I like this the New York Evening Post writes right around the time of the panic of 1819 time and the laws of trade will restore things to an equilibrium if legislators do not rashly interfere in the natural course of events that's pretty good pretty reasonably sophisticated but the second major episode and significant one that involves a downturn occurs in the 1830s and this is tied together with Andrew Jackson's war against the second bank of the United States Andrew Jackson is elected u.s. president I mean I know some of the American students will know this but view from all over the world I don't expect you to and would be slightly creeped out if you knew all the US presidents there are so many things in this world to go out and enjoy that if you're confining yourself to memorizing presidents it's just just a terrible outrage but Jackson was elected in 1828 and served two four-year terms mm-hmm Jackson was a hard money man from from the start of his of his tenure he had advocated hard money in Tennessee he blamed the Bank of the United States for the panic of 1819 so he's very much in the mainstream of this hard a tradition that I'm describing to you so when he takes office there are he has several reasons that he wants to move against the second bank of the United States and again I insist to you that if you read a typical US history a textbook the account of Jackson and his war on the bank of the United States portrays him as a complete moron he's just an idiot that just doesn't understand all the benefits of a National Bank but there were really had his reasons and some were economic some were not one of them was ideological philosophical and that is that involves the Jacksonian slogan of equal rights now with the Jacksonians meant by equal rights is not what the mainstream of US politics today means by equal rights today equal rights means if you are thought by the political class to be disadvantaged in some way then equal rights means we grab somebody's loot and hand it to you that makes you equal that was not what the Jacksonians met the Jacksonians did not mean that to bring about equal rights we take from one group and give to another their view was we don't take from any group and give it to anybody else nobody gets a thing that's equal rights and Jackson thought that was the best way that the interests of the working man can be vindicated not by giving him ill-gotten loot but by not privilege another people by not privilege ngosource class just giving everybody an opportunity to advance himself the way the US banking system was operating was offensive to this principle of equal rights in the eyes of some Jacksonians precisely because of the privilege of the suspension of species there was no other industry that was allowed to operate on such a basis you know a drycleaner can't say to you when you come to pick up your pants look your pants are really cool and I've been wearing them for like a week so you know come back in like four or five weeks and maybe I'll give them feel like it no one's allowed to operate like that you would have to close your doors you'd be sued whatever something would would happen but instead right you're there's a special privilege granted to banks now every year I when we happen to tune into that movie It's a Wonderful Life I ruin this for my wife every year I ruin it because the Jimmy Stewart character is saying or I don't have your money her a Chad fresh all shut whatever and I'm saying you brought me fractional reserve bank or I mean look at what's in it chris is a great Simpsons parody of It's a Wonderful Life where where Moe Szyslak is in line trying to get money any hair I don't have your money hurts and Fred's house and Moe turns around said hey what's my money do in your house Fred he belts him in the face so I I just time I just drain all the fun out of everything basically so that was the argument that if we believe in equal rights it also applies to banking so that's a very subversive idea secondly of course Jackson reiterates the constitutional argument that I made earlier and I won't dwell on although I will point out to you that the Supreme Court had since said it was okay constitutionally for there to be a National Bank established so how who does Jackson think he is to continue to say no no it isn't well Jackson in his veto message I'm going to give away that he is going to he's going to get rid of the bank but when the bank comes up when the bank makes an early request for its recharter in 1832 and he vetoes it in his bank veto message he specifically says that it's not my responsibility as president to uphold the constitutional law handed down by the Supreme Court it's my responsibility to uphold the Constitution which is a different thing so he didn't he couldn't care less that some jerks on the Supreme Court said it was okay I also every branch has the responsibility to uphold the Constitution and I say it's not so I'm going to veto the thing all right so those are a couple of arguments he says in his initial message to the country both the constitutionality and the expediency of the law creating this Bank are well questioned by a large portion of our fellow citizens and it must be admitted by all that it has failed in the great end of establishing a uniform and sound currency he also believed that economically the bank was not necessary and it caused a kind of derangement of the economy now we've already talked this week of course about the Austrian theory of the business cycle so you notice that I haven't gone into that here because I don't think there's any need to belabor that point that's probably well very much in your heads but somebody who might watch this later is well advised to watch one of the Mises org videos on the Austrian theory of the business cycle to understand put the precise nature of the derangement that's brought about in the economy by artificial credit expansion and why it leads to a configuration of the economy that can't be sustained in the long run and has to culminate in a bust but it's interesting to note again I want to I want to share with you just a few quotations from Jacksonian monetary theorists just to make clear these are not these are not morons it's not they don't understand the banking system they obviously understand it all too well so William Googe says why should ingenuity exert itself in devising new modifications of paper banking the economy which prefers fictitious money to real is at best like that which prefers a leaky ship to a sound one and then I love this sarcastic remark that he makes he's talking about what would happen if we got rid of the Bank of the United States I would with the earth go tumbling toward the Sun like what would happen and he said he assured Americans that quote the Sun would shine the streams would flow and the earth would yield her increase if the bank of the United States was not in existence so you can see that even he at that time the 1830s had to deal with exactly what we deal with today the world would end we'd revert to barbarism you know wolves would run free in the streets if there weren't weren't for the central bank he had to deal with that at that time too now William Leggett whom I meant earlier I want to share some thoughts from him that Leggett I'm going to refer you to a book that's not in the bookstore buts published by Liberty fund there's a great collection of legate's editorials and they're not all on banking some of them are on slavery he was a great opponent of slavery but and some of them just on abstract philosophy and he's a pretty good political philosopher I think certainly compared to most editorial writers today I know that we can dignify them as by calling them philosophers but leggett writings have been collected in a nice volume by Larry White and it's called Democratic editorials but they've spelling it the old-timey way Democratic with a k' democratic editorials and really I'm just almost picking these passages at random you'll find you can mine tremendous tremendously valuable testimony regarding this material in in that that little book but Leggett memorably calls for and this is his phrase the separation of bank and state you know yeah church and state yeah yeah it's sort of old hat Bank and state right the money we want to get the state out out of that so Leggett speaks as follows talking about the second bank which by the way the second bank in the 1820s there were years when it was not so inflationary so I'm not saying that it was just nothing but a printing press but he says this a pen let us cast let us but cast a glance at the manner in which the United States Bank regulated the currency in 1830 when in the short period of a twelve twelve months it extended its accommodations from forty to seventy millions of dollars this enormous expansion entirely uncalled for by any peculiar circumstance in the business condition of the country alas he isn't not entirely sound was followed by the invariable consequences of an inflation of the currency goods and stocks rose speculation was excited a great number of extensive enterprises were undertaken canals were laid out railroads projected and the whole business of the country was stimulated into unnatural and unsanitary activity yeah but I must also share with you his testimony from 1837 the year of course of the panic of 1837 in order to know what in his mind was the connection between inflationary bank credit and the calamity that struck the country he wrote and this is I put this in meltdown as my book from 2009 he says what has been whatever must be the consequences of such a sudden and prodigious inflation of the currency business stimulated to the most unhealthy activity a vast amount of overproduction in the mechanic arts a vast amount of speculation in property of every kind and named at fictitious values obviously we wouldn't know anything about that and finally a vast and terrific crash when the treacherous and unsustainable basis crumbles beneath the stupendous fabric of credit and the structure falls to the ground burying in its ruins thousands who exalted in the fancied security of their elevation men nowadays go to bed deeming themselves rich and wake in the morning to find themselves stripped of even the little they really had they count deluded creatures on the continued liberality of the banks whose persuasive and treatise seduced them into the slippery paths of speculation so we might in our own day think of house flipping or the housing bubble but they have now to learn that the banks cannot help them if they would and would not if they could they were free enough to lend their aid when assistance is not needed but now when it is indispensable to carry out the projects which would not have been undertaken but for the temptations they the banks held forth no further resources can be supplied that is very interesting because that's very suggestive of the idea that capital projects or long term consumer projects let's say their interest rate-sensitive are undertaken and then as we know as a result input prices will tend to rise well then additional bank credit is necessary to carry out the project and these are projects that wouldn't have been undertaken if it hadn't been for the Sheep and artificially attractive terms the banks were offering in the first place I mean this is you know this is sort of proto Austrian here from just some editorial writer in the 1830s then he writes a several months later he says any person who has soberly observed the course of events for the last three years must have foreseen the very state of things which now exists he will see that the banks have been striving with all their might each emulating the other to force their issues into circulation and flood the land with their wretched substitute for money he will see that they have used every art of Khojaly and allurement to entice men to accept their proffer to aid that in this way they gradually excited a thirst for speculation which they said you lessly stimulated until it increased to a delirious fever and Men in the epidemic frenzy of the hour wildly rushed upon all sorts of desperate adventures they dug canals where no commerce asked for the means of transportation they open roads where no travellers desired to penetrate and they built cities where there were none to inhabit mm all right so there we have right knit and certain your own examples from Doug French's presentation the other day so where there are constitutional arguments there are philosophical arguments there are economic arguments there are also arguments political arguments there are concerns at the potential for corruption and abuse when one institution or indeed one man hold the kind of authority that the president of the Bank of the United States held who was the president of the Bank of the United States Nicholas Biddle of course the name rest sound like Nicholas Nickleby right out of Dickens or the villain come again Nicholas Biddle who in some ways had the temperament of a modern Federal Reserve Chairman when he he wanted the bank's activities to be above politics but in practice he was very attuned to politics he really held people who are not directly connected with the bank in a really shocking contempt and treated them quite condescendingly now the charter of the bank expires set to expire in 1836 the 20-year charter but Biddle is persuaded by Henry Clay of Kentucky who was a congressman and later a senator to apply for an early renewal of the bank's charter before the election of 1832 and the strategy here was that after the election of 1832 with with Jackson safely back in power Jackson will have much more leeway to abuse the bank and refuse to renew it and whatever but now if we sort of force him to take a position right around the time of the election he won't risk taking such an outrageous position and he'll renew the Charter and this was a gross miscalculation it was just thought that there's no way Jackson's going to rally public opinion against the second bank of the United States but indeed he could and and he he rallied them with a populist appeal against it so the Charter was indeed put up for early renewal in 1832 mid at mid 1832 Biddle said we have determined on applying to the present Congress for renewal of the Charter and he claimed this had nothing whatsoever to do with elections or the president I mean we're you know we're national bankers we're totally above whatever's going on in politics what I am paying attention I know nothing about it meaning the president's election and care nothing about it okay however Biddle then not taking anything for granted and not leaving this up to chance approach newspapers and newspaper editors with articles that had been written in favor of a renewal of the bank's Charter and urged them to publish them and when I say urge them I don't mean he went and said hey it'd be really super if you publish this article this is what I mean quote this is Biddle if you will cause the articles I have indicated and others which I may prepare to be inserted in the newspaper I will once paid to you $1,000 whoo that's a little bit more than saying I'll be your best friend right and it turns out that's like $22,000 today wow we're running some articles why are we so that's the sort of thing that Jackson could say you see what I said what I'm saying right I'm not imagining this this is what I'm talking about right so again there's this sense that Jackson is just a stupid idiotic conspiracy theorist who sees corruption where there is none well all right well let's continue to evaluate it um one of the strongest supporters of the bank in the US Congress was Daniel Webster Webster began as a u.s. congressman from New Hampshire then was at a u.s. congressman from Massachusetts then was a senator from Massachusetts and Webster had initially been very much an opponent of the bank's charter but then he became a strong supporter after being added to the payroll so during the controversy over the renewal and Webster was very much an advocate for the renewal of the Charter he wrote to Nicholas Biddle and said I believe my retainer has not been renewed or refreshed as usual if it be wished that my relation to the bank should be continued it may be well to send the usual retainers oh ok like you're supposed to say that to him in person you don't write that down all right so the the bill to renew the bank's charter passes both houses of Congress and Jackson vetoes it so it turns out that as I said this was a great miscalculation well then in the spring of 1833 to the bank even though it's be our turfs not renewed it remember it's still going to exist until 1836 then after that it's no longer a federally chartered bank it continues as a state chartered bank for five years and then goes bankrupt that's the end of it but in the spring of 1833 Jackson engages in stage two against the bank which is to remove the federal deposits but that was one of the functions of a National Bank it holds the deposit of the federal government he's going to remove them this this means he's taking the funds away from them as a base for credit expansion on their part and also he's removing from them the prestige of of safeguarding them and Biddle had thought there was no way Jackson was going to carry that out but indeed he did and there is some evidence that that Biddle tried to punish the president for this by engaging in a contraction of the money supply and calling in loans and causing great difficulties now of course the expansion of the money supply in the first place was the problem so strictly speaking contraction is not so much the problem but nevertheless the idea that you had one man who could do this and caused some distress in various sectors of the economy again seemed to people like this and using this as a kind of threat here extortion that this seemed again to confirm that there was a risk of abuse inherent in the system okay now finally Biddle decides that the thing to do at this point is to shore up his position by trying to offer as many congressmen as he could paid positions in the bank so that then they would they would speak up more vigorously against what the president was doing so Biddle boasted that in half an hour I could remove all the constitutional scruples in the District of Columbia and he says a dozen cashier ships fifty clerkships a hundred directorships two worthy friends who have no character and no money and so indeed he more or less try to engage in this and and so finally you know this this was to continue to be a victory for the president he got the Charter to be not renewed and he got the deposits removed and placed in state banks but there was at one there was one moment during the sequence of events that Jackson was actually in a sickbed and he attributed his sickness to the machinations of the bank and he said to his President Martin Van Buren the bank is trying to kill me I will kill it and he did it he did it now having said this the usual sort of response from historians is well because he got rid of the Bank of the United States that's why we had the panic of 1837 you know if you don't have a National Bank it's all just terrible right everything's terrible so like there's no causal mechanism usually presented it's just he got rid of the National Bank and then there was a panic so I don't know I guess it must be one led to the other like there's no no theory involved at all just a bunch of events and they try to correlate them so what exactly did happen here well one of the most common explanations for what happened in the panic of 1837 was that with the closing of the second bank there there were fewer restraints now on the inflationary issues of the state banks and indeed by placing the deposits in the state banks they served as the base for credit expansion in the state banks and so you had inflationary boom because of that and that led to a bust well okay but that's going to be the criticism well that's a proto Austrian view I'm perfectly willing to accept that but the risk but the policy proposal that is said to follow from this is that we need a giant National Bank to oversee state banks to make sure they don't do this okay but what if you just actually just got rid of all the special privileges for the state banks and made it more difficult for them to do this that was the approach that some of the hard money people took they wondered is it really good to try to correct the errors of the state banks by erecting a gigantic bank that will have the same powers of derangement that the smaller banks have that won't necessarily act as a police of the of the smaller banks but will inflate in tandem with them this is not necessarily the best approach so in Delaware Senator William wells had been unconvinced from the start that this was the way to go that the way to keep the state banks in line was to have a gigantic bank to watch over them but this gigantic Bank would be founded on the same principles and could also engage in artificial credit expansion so he had said from the beginning of the second Bank this bill came out of the hands of the administration supposedly for the purpose of curtailing the over issue of bank paper and yet it came prepared to inflict on us the same evil with this new Bank being itself nothing more than a simple paper making machine and constituting in this respect a scheme of policy about as wise as hiding oneself in the water for fear of the rain the disease it is said is the banking fever of the states and this is to be cured by giving them the banking fever of the Bank of the United States Samuel Tilden of a hard money US senator of New York likewise wondered how could a large bank constituted on essentially the same principles be expected to regulate beneficially the lesser banks has enlarged power been found to be less liable to abuse than limited power has concentrated power been found less liable to abuse than distributed power so that's why the real hard money alternative to the second bank was not Jackson's approach certainly non-renewal is fair enough as far as it goes but the removal of the deposits and then placing them in the state banks was not the hard money approach a much better solution recommended by hard money advocates at the time is what became known as the independent Treasury so in that case with an independent the independent Treasury the federal deposits would be kept out of the state banks and would be retained by the Treasury they would be removed for the banking system altogether hard money supporters believed that the federal government was propping up this unsound system of artificial credit expansion and fractional reserve banking by distributing the federal deposits and providing a pyramid on which credit expansion could take place by accepting these banks money in payment of taxes and thereby giving these banks notes special privileges and a special kind of prestige higher value because if you can pay these notes in taxes but not other notes and they're more valuable to you gives them an artificial advantage and also paying these notes back out again so stop doing that so Googe said if the operations of government could be completely separated from those of the bank's the system would be shorn of half its evils if government would neither deposit the public funds in the banks nor borrow money from the banks and if it would in no case either receive banknotes or pay away banking it's okay now the independent Treasury Act briefly existed in 1840 but it was repealed and then it was in 1846 that we got the independent Treasury for about 15 years what was interesting about this this would be the exact opposite the exact opposite of what the establishment would call for today I mean this would people would have to be hospitalized if you proposed this to them today and yet it may have been the best most stable monetary system the United States has ever had this is that was the judgment of Jeff Hummel I think they're good grounds for this for example it's interesting to note the Mexican War which took butch began in 1846 means the only war in US history that was not at least partially financed by paper money inflation there was a much smaller relationship might greatly diminished relationship between the federal government of the banks at this president there was more or less separation of bank and state so taxes and borrowing more or less fun too this was not just paper money inflation and it's interesting to note that the the two major u.s. wars that were sort of bookends of the Mexican War the war of 1812 and the Civil War in each case we saw massive inflation the suspension of specie payments and a wartime economic boom that was followed by a bust but we did not see any of these phenomena after or during the Mexican War secondly we did have something called the panic of 1857 now when you're dealing with critics almost none of them know anything of any individual characteristics of any of these panics they're all terrible and unspeakable and the worst things ever and much worse than the Great Depression or whatever like um you always III was answering a critic who referred to the panic of 1857 as a howling depression a howling depression that lasted for six months I mean that must have been that intense six months it was actually probably the most mild of the downturns of the major ones that we remember anyway and again again we can attribute this to there was still artificial credit creation taking place but on a much smaller scale and in fact James Buchanan who was present at the president at the time said it is apparent that our existing misfortunes have proceeded solely from our extravagant and vicious system of paper currency and bank credits such dhana shingly people were drawing these conclusions the money supply fell interest rates rose government spending did not increase and nobody was bailed out and yet the thing was over in six months and Buchanan warned Americans that quote the periodical revulsion –zz which have existed in our past history must continue to return at intervals so long as our present unbounded system of Bank credits shall prevail and Buchanan envisioned and proposed a federal bankruptcy law that would not support the suspension of specie payments but would in fact shut them down when they were unable to satisfy depositor demands and he said the instinct of self-preservation might produce a wholesome restraint upon their banking business if they knew in advance that a suspension of specie payments would inevitably produce their civil death now finally just a brief word about what happened in the 1870s now for a long time we were told the 1870s were a period of what's called what was called the long depression this long depression was said to have lasted from 1873 to 1879 and the more moderate tellings of the story and from 1873 to 1896 in the more outlandish ones well it turns out that in recent years historians have more or less come to the conclusion that this was a mistake this is a misreading of the evidence there was in fact no no long depression of the 1870s I want to read you a quick passage from the New York Times and then also a little something from Milton Friedman here's the New York Times from just a few years ago it's astonishing I mean I want to point this out because when you know once every 150 years they're right about something I want to give credit where it's due to the New York Times so they write recent detailed reconstructions of 19th century data by economic historians show that there was no 1870s depression aside from a short recession in 1873 in fact the decade saw possibly the fastest sustained growth in American history it's a good ol economica story the exactly a hundred percent wrong employment grew strongly faster than the rate of emigration consumption of food and other goods rose across the board on a per capita basis almost all output measures were up spectacularly by the end of the decade people were better housed better clothed and lived on bigger farms department stores were popping up even in medium-sized cities America was transforming into the world's first mass consumer society Milton Friedman and Anna Schwartz in their monetary history of the US that came out in 1963 also sort of had an instinct that something wasn't quite right in the traditional telling of this now rothbard had it right absolutely in his history of money and banking in the u.s. that collection edited by Joe Salerno he gets this right completes that there isn't as clearly as no downturn historians are just concluding it because prices fell by roughly 3.8 percent a year things must have been terrible there's no reason that that would make things terrible and here's Friedman and Schwartz the contraction was long and it was severe now all right he says but the sharp decline in financial magnitudes so much more obvious and so much better documented than the behavior of a host of poorly measured physical magnitudes may well have led contemporary observers and later students to overestimate the severity of the contraction and perhaps even its length and he goes on but but a little bit low on time here it is also worth noting that the Bank panics after the Civil War or war between the states between then and and 1913 our phenomenon that really were a curiosity in the rest of the world there were no such panics in Canada this is this was not something that was striking the whole world part of the reason for it in the u.s. at least part of it involves the unit banking regulations that existed at the state level that said that every bank can have only one office no interstate or intrastate of branch banking is allowed and that made every bank very vulnerable to local swings right extremely fragile and undefined so you see waves of difficulties that you don't see elsewhere where these regulations do not exist and it's interesting to note that in even during these pre fed Bank panics that the the losses depositors suffered were relatively low they amounted to only 0.1% of GDP during the panic of 1893 which was the worst of them all by contrast just in the past thirty years of the central bank era the world has seen twenty banking crises that led to depositor losses in excess of 10 percent of GDP and half of those losses saw half of those losses were in excess of 20% of GDP well there's much more that can be said about this we could talk about the feds real record that supposedly these panics were terrible and they were caused by the free market and the Fed has given us no panics and and shorter and shallower recessions none of that is true and so to pursue this topic further particularly if you want to carry it out in your own research or learn more about it or if some of that stuff I just said about the Fed last night before bed I made a page on my website with links that can at least get you started on these topics to articles that I think are very worthwhile and that will help you and will give you information that nobody in your class will have and that's Tom woods comm slash panics so check that out and thank you very much you




Comments
  1. William Jasper, John McManus of the New American magazine, Thomas Woods of the von Mises Institute are all Roman Catholic conservatives. This is no problem for me, they are speaking TRUTH that is in concert with a biblical view of money as Leviticus 25, warns us of possible pitfalls. Debt cancellation is the warning by our Almighty God. If we ignore what the Almighty is saying in Leviticus 25, it is to our injury. Woods is correct, Jefferson is wiser.

    The Almighty is warning humanity, that will not listen to HIM. April 2019 a JUBILEE is about to happen through HIS kindness. It is as a result of human stupidity. Alexander Hamilton was much too PRIDEFUL to the point of rebellion.

  2. I believe in a chartered national bank (like the First Bank of the United States) but not a central bank (like the Federal Reserve)

  3. I believe in a chartered national bank (like the First Bank of the United States) but not a central bank (like the Federal Reserve)

  4. I believe in a chartered national bank (like the First Bank of the United States) but not a central bank (like the Federal Reserve)

  5. I believe in a chartered national bank (like the First Bank of the United States) but not a central bank (like the Federal Reserve)

  6. 323 comments 1k 👍 if all those people Shared on FB and Twitter the ideas would spread quicker especially amount the the young. We are weather we like it or not in a battle for the minds and hearts of our fellow citizens.

  7. No mention of the 1890 recession? Another good example of a hard money economy. Friedman and Swartz make no mention of it either, they are frauds in my opinion. Benjamin Harrison was president at the time, he took a very hands off approach to the economy and the recession of 1890 lasted a whopping 6 months.
    No economists every talk about it, except Saifadean Ammous in the Bitcoin Standard.

  8. You have to wonder all this talk against the Federal Reserve will translate into a World banking Institution

  9. Might be helpful to deepen the approach: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3141447

  10. State Nullification is NOT constitutional, it is "political posturing". See law scholar CALVIN MASSEY, in his 1990 article "The Locus of Sovereignty: Judicial Review, Legislative Supremacy, and Federalism in the Constitutional Traditions of Canada and the United States":
    https://scholarship.law.duke.edu/dlj/vol39/iss6/2/?

    You are being tricked into dismantling the USA to redistribute ALL the powers between new communist regions, communist city-states, and world government in the North American Union under the red UNO. https://NoSnowinMoscow.wordpress.com/ — Ask yourself: why are there TWIN parallel "secession" movements in Canada-USA at the SAME TIME? Just as the two nations have been MERGED under the illegal SPP: except that officially you cannot merge a constitutional republic with a constitutional monarchy. One or both must be dismantled. That's what the State Nullification scam is for! Try to be LESS NAIVE !!!

    Here's what's really going on: just as Tom Woods was setting up his Nullification movement whose ONLY outcome is MASS SECESSION, this man, GILLES DUCEPPE, a "former" Marxist-Leninist-Maoist in CANADA was touring Canada urging ALL the provinces to SECEDE. Here are English translations of two of his videos:

    1. Gilles Duceppe Wants A North American Union:
    https://www.savetubevideo.com/?v=v-mIN7GMQdI

    2. Sovereignty to Function Together in The Americas:
    https://www.savetubevideo.com/?v=D_uHO2sPzi4

    Then, in this article below, DUCEPPE spells it out: the continental merger is underway, de facto, this is what our THREE federal governments signed the SPP for, and did NAFTA for, and this is why 9/11 was also done, to fast-track the merger under a MILITARY security perimeter around the continent. The Police State that Oathkeepers claims is being set up to protect the BANKERS from "you" when the financial system collapses, is IN FACT TO PUT THE NORTH AMERICAN (SOVIET) UNION INTO PLACE under RED WORLD GOVERNMENT. Do you really think you could even get at those bankers to do anything about them? The one thing OATHKEEPERS never mentions is that 9/11 was done FIRST TO FORCE COMPLETION OF THE NORTH AMERICAN UNION, as seen when Rumsfeld immediately announced the continental military perimeter. THAT is the basis of "Homeland Security".

    Gilles Duceppe wants "soveriegn states" to compose th North American (Soviet) Union – he doesn't mean Canada, US and Mexico, he means DISMANTLED provinces and states each become a "nation" with ALL powers… why? Because the COMMUNISTS who work WITH BIG BUSINESS (with the INTERNATIONAL BANKERS BEHIND THE FEDERAL RESERVE and the TRANS-NATIONAL CORPORATIONS) need to redistribute the powers into the new world government structure, and they can't DO IT with our FEDERAL NATIONS intact.

    http://en.calameo.com/books/000111790ae08bc88b826

    The entire Quebec "secession" movement has always been COMMUNIST controlled back to its origins, I know because I'm doing the research. In the sidebar at my site, you can download a FREE English translation of the 1972 manifesto of the PARTI QUEBECOIS that has run TWO referendums so far to "secede".

    The manifesto sets up a COMMUNIST state of Quebec linked to the "rest of Candaa" AND to the "USA" by "trade" deals !!! This is what the referendums of 1980 and 1995 were really for.

    JACQUES PARIZEAU ran the second referendum, he was a product of the London School of Economics, and an ADVISER to Lech Walesa of the Polish Solidarity movement. Walesa was recently EXPOSED as a double agent working the whole time for the SOVIETS! Now, how could COMMUNISM have "collapsed" if even AFTER the "collapse" there are Soviet double agents out there and FAKE democratic parties in countries that in fact NEVER LEFT the Soviet Union. It's a facade to complete the Soviet takeover of the West by going into "silent mode" to penetrate our countries. It has been done. Soviet KGB defector Anatoliy Golitsyn forewarned us on precisely this fact, the USSR was going to go underground to merge with the west. Get his books online free, New Lies For Old; and The Perestroika Deception. He also predicted Walesa was a Soviet agent, and he was proved right.

    We are GOING DOWN. Don't buy into phony State Nullification, the THREE FEDERAL leaders who signed the SPP need Tom Woods to FOOL YOU into dismantling North America for them.

    https://nosnowinmoscow.wordpress.com/

    Direct download link, 1972 manifesto of the PARTI QUEBECOIS to turn Quebec into a COMMUNIST COUNTRY – you had better look up the definition of what communism means before you read this:

    https://my.pcloud.com/publink/show?code=XZ7r5SZ4X0X3XCXAWLjTEpT7ly6Kbq2YtaV

  11. 17:56 What is the name of the book and the french author Tom mentioned? I can't seem to find it, nor spell it out.

  12. Instead of the reserve banking, why don't banks instead have a policy of delaying deposits in exchange for interest collected by loaning out the money from those deposits. This would keep banks from loaning out more than they can pay back.

  13. William Jackson Barry was a lecturer and author here in New Zealand in the 19th century. He lived through the depression of 1874 to 1991; or 1870 to 1896 in the Otago goldfields. He recorded extreme deprivation which he suffered himself. This does not reflect conditions in the USA of course, but is indicative..

  14. "They built canals where there was no commerce, cities with no people to inhabit, roads where no traveler wished to penetrate" Loved this quote

  15. This is just wrong. This speaker has created an idealised world in his mind where the free flow of goods,  labour and capital by fair exchange will maximise the overall benefit of all. And his logic works within that basic assumption. Perhaps that's why he appears so pleased with himself. But sadly, the human condition is such that there are certain facts about the world that mean what he idealises will never come to pass: a) All systems in an environment driving evolution are sub-optimal. And that includes any particular form of human organisation of the economy or anything else; b) Brigandage, conquest and theft are to human society as predation and meat-eating are to the natural world – an ineradicable part of existence.c) There is no set of objective, immutable laws of economics and thus no ultimate definition of economic optimality. Economic optimisation is entirely in the eye of the beholder(s). d) People with enough strength to use against others will always be able to distort markets to be in their favour by means other than fair price competition. That will be done by those at the top and those at the bottom of the economic pecking order. The speaker tells us of the "true path" that should be followed in his idealised view of the world. He is indeed like Cato of Rome. Railing against the immorality of the modern City and longing for a past of order, and the solid virtues of the Roman aristocracy and the sturdy peasant soldiers that followed them. It was, of course, all a romantic dream with no chance of realisation, as is the free-market republic that this speaker extolls.

  16. tom woods is like a kind of medication. when i hear him speak, it feels like sitting in the sun. it feels very nice, warm and friendly. some people go to a solarium to cure their apathy, i listen to tom woods podacasts every day. and after doing that, every time i get so excited at the prospect that, "wait a minute… maybe this country can be saved after all?"

  17. That the Federal Reserve System is an obvious failure is revealed by the continuous loss of purchasing power of the Federal Reserve Notes issued.

    I do agree that historians have a good deal to tell us about the origins of cycles of boom and bust. One historian I learned a good deal from was Jackson Turner Main, who wrote a groundbreaking study of wealth and income inequality during the era of the founding fathers. What Main understood clearly is that the system of banking and credit exacerbated but did not cause these cycles. The cycles of boom and bust are caused by a combination of land monopoly and land speculation. From the moment Europeans arrived in North America, the land monopoly game started. The size of the continent made this difficult until the mid-19th century. In a great irony of history, the resistance of the tribal societies to encroachment on territory they controlled contributed to the rise in land values along the Atlantic coast and to the great personal fortunes of the landed families. As the tribes were pushed back, colonial leaders formed companies to engage in "western" land speculations. None was more successful in these speculations than George Washington.

    Speculation in land always stimulates a frenzy of activity. When credit is cheap and readily obtainable the frenzy is all the more furious. Every land speculator fully expects that before payment is due to the lender, that the deed obtained will be transferred to someone else at a huge profit. And, the purchaser of the deed likely expects the experience, and so on, until the speculation-driven price rising can no longer be sustained by the real economy.

    One of the best describes of how these dynamics occur is found in the 1931 book by historian Frederick Lewis Allen, titled "Only Yesterday." Read what Allen provides regarding and credit-fueled land booms of the 1920s and how each crashed. We hear about the Florida land boom and crash, but the same thing occurred in cities and in the agricultural sector.

    Austrians need to spend more time examining land markets. At least one Austrian economics professor, Fred Foldvary, has done this and has taken advantage of the insights of Henry George to provide a synthesis of Austrian and George's theory of business cycles.

  18. Please tell me in which of his videos does Tom Woods talk about the price of items such as a chicken and how they have gone down since the beginning of the industrial revaluation.

  19. I can watch hours of this guy. So informative and thought provoking while being interesting and down to earth. Awesome Tom Woods, you are appreciated!

  20. Teunis how do u FRL gold coins? i can understand doing it with receipt for gold because as only a very small number of people tkae out their deposists at the same time so the goldsmiths of the 1600s(the bankers) realised they could lend out more receipts then what they had in reserve, you wouldn;t be able to do that with physical gold

  21. Fractional Reserve Banking will always exist, also in free markets. Yes, there will be gold (perhaps) but there will still bee Fractional Reserve Banking. 

  22. Great video. Not everyone can understand the concepts. But that's why were in this shape. The idea that deflation is bad is just ridiculous.

  23. Please Mr. Woods get a job, you books are not selling. You will need to dumb down Americans for another generation before they can become best sellers.

  24. pretorious70010 months agoin reply to Someideasandstuff
     >Comparing a tiny, ethnically homogenous country like Norway to the US is the height of stupidity.

    In the US, 2+2=4. What is it in Norway? 

  25. Why Europeans always be doing this? US is literally the size of the entire continent of Europe. It would be like Americans assuming all of Europe is the same, but yet we are the "idiots".

  26. We are living in a police state. People are being locked up with out charge or trial and being killed in America. The news just doesn't report it so people don't think it is happening.

    They are filing away all the calls and emails for when someone becomes a threat to their power. People are afraid to speak out about it because the government will make them disappear.

  27. Norway built their great wealth on capitalism and not going to war. They then moved to socialism and are burning through that wealth.

  28. Fine, how about we use the term intrusive? I don't give a rats ass how small a government is, if it's overly intrusive, then it has too much power and should be abolished!

  29. This lecture is hugely important, 'cause people used to actually think that once upon a time we used to live in a free-unregulated-markets without a federal reserve setting interest rates.

Leave a Reply

Your email address will not be published. Required fields are marked *