Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

What You Absolutely Need to Know About Money (Part Three)

From Venetian goldsmiths issuing paper receipts, to America's first and second central banks – the Bank of North America in 1781, and the First Bank of the United States in 1791 – we arrive at the year 1836.

Chapter Two, on the beginnings of central banking, ended with: "The Second Bank (of the United States, chartered in 1817) was bitterly opposed by President Andrew Jackson, who made the existence of the Bank, and its power over the people, a central issue in his campaign… Jackson won, and in 1836 the Second Bank of the United States' charter expired, along with another central banking experiment."

So, why did Andrew Jackson, after a successful first term as President of the United States, bet a second term on breaking up the huge, monumentally successful bank?

Why, indeed.

John Meacham's biography of Andrew Jackson, American Lion, lays bare the General's very Jeffersonian fear of the power and influence of banking interests.

Jackson exercised his veto power when a bill for the Bank's recharter passed the Senate and (narrowly) the House, after a former recharter opponent, Samuel Pierce Carson, "had obtained a loan of $20,000 from the Bank, and had changed his opinion."

Jackson eventually overcame the Bank's arsenal of loans and favors by appealing directly to the voters.

He reminded them, "It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes… artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society – the farmers, mechanics, and laborers – who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government."

Unfortunately for a democracy of the people, by the people, and for the people, the start of the Civil War – while emancipating slaves on one hand – enslaved the American public forever in a prison of government debt, courtesy of a plutocracy of banking masters.

Without a central bank and with State banks holding what was left of federal deposits – which had been disbursed among them by Jackson in his assault on the Second Bank – financing the Union's war efforts became almost impossible.

In 1862, pushed by Treasury Secretary Salmon P. Chase, Congress authorized the Treasury to print $150 million worth of "bills of credit," which it declared legal tender for all private debts. The bills of credit became known as greenbacks, because they were printed in green ink and backed by the United States.

It didn't matter to President Lincoln, or the Treasury Secretary, or Congress that emitting bills of credit without the backing of specie – gold or silver – was constitutionally dubious, at best. Such are the exigencies of war.

But it certainly did matter to the bankers.

For the first – and what would be the last – time in America's history, the Treasury was creating money, not the country's bankers.

Lincoln had no problem issuing fiat money from the Treasury, for free, to pay for the Union's war expenses, as opposed to borrowing from bankers and paying them interest when they created, free of charge to themselves, their own fiat money.

By the end of the Civil War, over $432 million worth of greenbacks had been issued, but much more was needed – immediately.

So, in 1863 Congress passed the National Banking Act. While it was well and good to issue greenbacks with no real backing but the government's promises, Lincoln and Chase were fearful that, if the war continued to go badly for the North, the public would lose faith in greenbacks.

The National Banking Act chartered "national" banks across the Union under Washington's regulatory oversight. The new scheme was based on old, familiar ways – with a twist. The new national or "federal" banks, with the presumed backing of Washington, would create a market for the bonds that the Union desperately needed to issue.

Banks bought government bonds – with whatever depositor monies they had – and deposited those same bonds back with the Treasury as "reserves." The Treasury then issued banknotes – against those reserves – to the various banks, with their name on the new notes. In essence, the banks got more money back from the government by buying more of their bonds, now with their new bank notes.

In fact, the scheme is still going on today, only to an infinitely larger degree. Banks buy Treasurys and use those government-backed bonds as reserves, in lieu of cash reserves. They use their massive holdings of Treasurys as "risk-free" collateral against loans of cash, from the Fed and other bank, which they use to buy more Treasurys – always to create more money to lend, against which they collect interest.

It was brilliant for both the Union and the bankers. The scheme financed the Union's war and created a growing and prosperous banking industry. But it worked out better for the bankers, who amassed enough power to convince the government that they could continue the scheme without the government printing any more of its own money on account of political fighting over taxing the citizenry to pay for Reconstruction.

Bankers cemented their position as the ultimate financiers of government expenditures, especially when taxes are politically anathema.

Then – miraculously – in 1870, the new Chief Justice of the United States, Salmon P. Chase (yes, the former Treasury Secretary who issued greenbacks) ruled that the government's issuance of bills of credit (greenbacks) was – surprise – unconstitutional.

The bankers had won. It was game over.

Who were these bankers? There were many of them.

One in particular – not a single banker, but a European banking dynasty – was the richest, most powerful player in the the history of America's banking past and future. They created an American banking behemoth.

The Rothschilds, of Frankfurt, Germany, were fabulously wealthy by the early 19th century. They had banking and merchant operations in Germany, Austria, Italy, Paris, and London. The Rothschilds also had interests in the new United States of America.

Rothschild interests financed both the Union and the Confederacy in the Civil War. But when the Confederacy appeared to be losing, the family bankers rushed support to the Union by buying massive amounts of bonds – and famously bought up the South's distressed debts for mere pennies – with an astute insider's perspective that the North would make good on all the nation's debts.

As far back as 1837, London-based Nathan Rothschild backed an American merchant, George Peabody. Peabody came to Britain to sell canal-construction bonds and later became the City of London's largest issuer of letters of credit to transatlantic shippers.

Peabody befriended American banker Junius Morgan in 1850 and, with the Rothschilds' backing, established Peabody, Morgan & Company in 1854.

Peabody, Morgan & Company became fiscal agents for the sale of Union bonds in London – and profited handsomely, financing trade between Europe, the United States and the Confederacy.

Junius Morgan's son, John Pierpont Morgan, eventually took over his father's banking interests. He would become the principal power behind the creation of the Federal Reserve System.

It's important to understand that, because of certain common backers, banking giants in New York were essentially friendly competitors. But the Westward Expansion of the United States was opening up new opportunities farther and farther afield from the locus of New York banking power. Upstart Western banks were growing rapidly.

Still, not much had changed from the original banking model, which meant banks didn't keep adequate reserves in gold or silver or cash. Panics, booms, and busts were almost regular, cyclical events.

The late 19th century saw serious crashes in 1873, 1884, and 1893.

And then there was the Panic of 1907.

The crisis in 1907 shook the nation. The banking system, with all of its obvious pretenses exposed, came close to total collapse.

The system was saved by J.P. Morgan… but it was too close for comfort.

Something had to be done to squash the Western banking upstarts who were out-gaining their New York and Eastern rivals. Somehow, the New York banking cartel had to have a "lender of last resort" to infinitely perpetuate their monumentally profitable banking schemes.

That's when the "Creature from Jekyll Island" was hatched.

You'll hear about that soon.

Related Articles and News:

Join the conversation. Click here to jump to comments…

About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

Read full bio

  1. fallingman | February 27, 2013

    It's a sordid tale. Thanks very much for telling it…in detail.

    To most Andy Jackson is "just another dead President." Despite his flaws, he was a hero in THIS cause. And what does he get for his efforts in burying Nicholas Biddle and the Second bank of the United States…the Central Bank…and giving us a chance?

    They put his picture on the $20 bill issued by its successor, the wretched Federal Reserve, enemy of the people…puppet of the insider banking "elite." It's a crime.

    Oh Andy, where are the likes of you now?

    Dude was one tough S.O.B.

  2. James | February 27, 2013

    History repeats itself.

    Thanks Shah for providing us your insight to our banking system from a historical perspective.

    What happened between the early 1860s' to 1913 when the Federal Reserve Act was enacted gives us a good insight as to where we are today and a perspective as to where we as a nation should be heading in the future.

    One thing is certain. Our present financial banking structure is not working. It strongly favors the bankers and Wall Street financiers. It results in inequality and injustice to the majority of the middle class who are getting shafted. Changes to the system are in order.

    What is most perplexing is mainstream America is not cognizant of the gigantic problem facing our nation. You and other investment writers have spelled out the problems clearly and in detail to enlighten your readers, and as result, we are ahead of the pack and can prepare for the worst kind of scenario.

    Is imminent financial catastrophe the end result? I sure hope not. We will all be suffering the financial pain then.

    What is more disturbing is it is not only the U.S. that is hurting. Other countries like Japan and Europe are equally just as bad or worse off. Will it take a global financial meltdown to take place before our financial houses can be restored?

    In college, my Sociology 101 professor always brought out the bell curve to explain the birth and the life of institutions. Is the U.S. as well as other countries on the top of this bell curve and the only direction is on the other side of the bell curve? …creative destruction?

    Looking forward to reading your future articles.

Leave a Reply

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

Some HTML is OK