Whether by luck or fate, this nation was founded in the same year that
Adam Smith wrote his magnum opus, “On The Wealth Of Nations.”
Many of us consider Smith the most significant economist of all time; after all, he invented the discipline of economics.
Before Smith, rudimentary commercial activity wasn’t considered something that people spent time studying. Day-to-day commerce just happened without rhyme or reason. But Smith changed all that. By framing his discussion around a method for countries to accumulate wealth, Smith built an intellectual framework that nations could follow to secure lasting prosperity. To reduce Smith’s formula into a word: for Smith, the way to wealth and a rising standard of living was “Production.”
Countries could become self-sufficient and wealthy by making things and manufacturing the goods and products needed for everyday life. Their wealth would grow as their manufacturing became streamlined and efficient and utilized the latest machinery and production methods. Providing those items the people used daily would raise everyone’s overall standard of living.
Smith provided the formula upon which America would become the most extraordinary industrial and commercial country of its time to the newly formed United States.
Many of the founding fathers were avid readers of Smith, James Madison
nominated the “Wealth of Nations” to be included in the newly formed
While Thomas Jefferson called it the best book on economics yet in existence.
However, at that time, the nation’s founders did not agree with Smith’s Global Trade Policies (Smith would apply substantial tariffs, while the founders essentially wanted trade to be free). The country’s early leaders would later change their position on tariffs, and they would become a chief source of income for the fledgling nation.
But one thing they were certain of, from the beginning, was that America’s first leaders set the country solidly on Smith’s path of promoting self-sufficient production. The American economy was designed to make, build, and grow its prosperity.
But even in these halcyon days of emerging national independence and growing economic prosperity, there was a crying need for some financial structure to rein in America’s quest for liberty. Alexander Hamilton, the country’s first Treasury Secretary, had trouble paying the government’s bills. Reluctant to levy taxes directly on the people, the nation’s leaders eventually decided to charge tariffs on international trade as the fairest and most equitable method of raising revenue.
But how Hamilton would administer those tariffs and pay the nation’s debt was still unclear. After ten years of wangling, George Washington and the
others acceded to Hamilton’s proposal to form a national bank. Thus, the First Bank of the United States was chartered in 1791.
However, I caution you to avoid making the mistake that many have in thinking that the First Bank of the United States, or for that matter the Second Bank, in any way resembled the concept of today’s Federal Reserve. A Central bank that guided “monetary policy” or “economic growth” was anathema to Hamilton or the others. Hamilton believed that promoting the American economy’s growth was solely the US Treasury’s role.
Ten years after it began, the First Bank of the United States met an ignoble end. The First Bank was inefficient and had little benefit for the American government or people. A decade after its end, the Second Bank of the United States began in its place, and thus began one of the most fascinating chapters in America’s Financial History: The great “Bank War.”
Let’s set the stage. For 50 years, America had grown and prospered, essentially without a Central Bank. But there were circles within America pushing for a more English approach to our finances. The Bank of England had operated for over a century (BOE was founded in 1694), gave the English the unified currency (the British Pound), and greatly facilitated the country’s international trade.
While in the States, several “National Banks” had been chartered, each with the ability to issue currency. So “trade,” even between the different States, was brutal, much less trade outside our borders.
So, was the answer to the nation’s financial issues a “national bank?”
Certainly not, to a rising politician from Tennessee. Nicknamed “Old Hickory” for his ramrod demeanor and strong opinions, Andrew Jackson rode into Washington in 1829 as the nation’s seventh President. Reminiscent of a former President and current Presidential Candidate, Jackson is one of the most controversial politicians in American History.
A decorated General who was also a lawyer and plantation owner, he was also a slave-owning Southern Gentleman who had built his own “financial empire,” including a vast plantation. By his death in 1845, Jackson’s estate consisted of one of the most extensive cotton plantations in Tennessee, with 1,000 acres under cultivation, and primarily managed by the 150 enslaved people who lived there.
Along the way, Jackson narrowly escaped personal bankruptcy when in 1804, he speculated on a purchase of 25,000 acres of land, using a promissory note as collateral. When the banks failed to honor the note, Jackson scrambled to sell the ground shortly before the bankruptcy court would have foreclosed. Many historians point to this moment when Jackson turned against the banks.
That may be the case. Or, like Adam Smith, Jackson’s upbringing as a frugal Presbyterian Scotsman predisposed him to avoid debt. But whatever the reason, Jackson’s anti-financier stance resonated with the American people. The people saw the banks favoring speculators and merchants over the artisans and farmers. They considered it a clear case of favoring the financial interests over the producers. Jackson became the average man’s hero and America’s first populist President.
In the end, Jackson used the same strategy on the Second Bank of the United States that had worked on the First Bank. He let its charter expire. Thus, the second great financial takeover of the American economy ended.
So, from the nation’s founding until 1913, with two ineffectual exceptions, America was without a Central Bank. Many financial historians call this period the “Non-Bank” period of American history. But it was much more than that.
From 1776 until 1913, it was the production class that held sway. The foundations that would create the “greatest nation on earth” were being laid.
Many have labeled this period as America’s Industrial Revolution. Technological advances in manufacturing, energy production, transportation, and communication occurred. Giants in Production have their names attached to the remarkable inventions associated with the nation’s new-found ability to make things, to produce.
In 1793, Eli Whitney invented the Cotton Gin; Samuel Slater opened the first textile manufacturer in America the following year. Andrew Jackson calls Slater: “the father of the American Industrial Revolution,” mass-produced clothing was now available to everyone.
In 1807, the first of Robert Fulton’s steam-powered boats began taking passengers from New York to Albany on the Hudson River. Ten years later, those steamboats took raw materials and products from the Atlantic to the Great Lakes using the newly completed Erie Canal. It opened up the entire Mid-Atlantic region and created the great industrial centers of Pennsylvania, Ohio, New York, and beyond.
1869, the Transcontinental Railroad was completed. American Industry had tamed the continent. It united the nation like never before. It was now practical to move people and products from coast to coast.
John D. Rockefeller’s Standard Oil discovered oil in Texas in 1870, and America was energy independent for a century.
All these advances, and so much more, were all part of the Time of the Producers — when Industry built the foundations of modern America.
But much of this industrial vibrancy began to fade with the dawning of the twentieth century.
Shortly after the twentieth century began, in 1913, a new American Era started the Era of the Financiers. And they would compete with the manufacturing sector for America’s investments and resources.
Meeting in complete secrecy at Jekyll Island, six men devised an American Central Bank. They knew enough of history and how Andrew Jackson had crushed the last attempt at a “Central Bank” that they cunningly named this new organization the Federal Reserve BOARD (not the bank). And so, for the first time in 137 years, the United States would have a genuine, supervising Central Bank — a boon to some, a replica of the English system.
It didn’t take long for things to change in the country dramatically. Like those Jackson supporters feared in 1829, the financiers tilted the scales. Speculators and merchants would get preferential treatment over the artisans and farmers.
It was the beginning of the Financier’s dominance over the Producers.