Part 5 of 5: From "Our Country, Then and Now" Chapter 2, "Money and Banking"
Introduction
This is Part 5 of a 5-part series that reproduces, with the cooperation of Clarity Press, Chapter 2, “Money and Banking” of my recent book, Our Country, Then and Now. This chapter explains how government debt and usury, two of the most evil and destructive elements of today’s economic life, became built into the very fabric of governance in the United States, and by extension, all other nations of the Western world. The system actually originated in its modern form with the Bank of England that destroyed the indigenous monetary system of the British Isles. Of course usury goes far back in history to the days of the ancient empires, including Rome, which it also destroyed. Our Country, Then and Now may be ordered directly from the publisher here. This chapter of the book is being reproduced and distributed because of the urgent need to replace today’s usury-based system that benefits only the monetary elite with a new form of money-creation and distribution. The information contained herein is of special importance as the new Trump administration attempts a complete overhaul of the U.S. economy.
Note: Editorial comments, if any, are bracketed […]
The Growth of Private Banking
Private banking can operate without a central bank simply on the basis of business charters. The US Constitution had nothing to say about such charters, except that if they were part of interstate commerce, they could be subject to Congressional regulation. But they weren’t regulated during this early period, as they were considered stand-alone institutions within their individual states.
Such banking began to flourish during the period between the Revolutionary War and the Civil War through a vast array of individual banks chartered by state governments that one day came to be known collectively—and derisively—as “Wildcat Banks.” But these banks were still essential to commerce.
Most of the banks lent money for ongoing business operations, for stocking of inventory, for meeting unusual demands on merchandise, or to farmers for hiring extra help for the fall harvest or spring planting. All these uses were viewed by borrowers as simply the cost of doing business, and interest rates were generally low. Rarely did the Wildcat Banks provide money for new business development, and, unlike modern times, almost never for speculation. Also, they were not used by state or local governments for infrastructure construction, a use viewed by Hamilton as an essential purpose of banking.
Some of these banks were actually owned and operated by state governments, though most were privately chartered to serve individual cities, towns, and farming areas. They were usually capitalized by local merchants and operated on a fractional reserve basis. They were required to redeem the paper money they issued in specie. Sometimes rival banks would organize runs in an attempt to put each other out of business by arranging for holders of paper notes to present them en masse for specie redemption.
Overall, what success the system achieved was encouraged by the fact that only by investing in bona fide productive enterprise could the banks stay in business. Even so, loose lending practices, financial uncertainties, runs, and even bad weather could lead to bank failures.
These banks printed and issued their own banknotes as loans. Obviously, this led to confusion, where there was little ability to compare the value of notes issued by different banks. Brokers bought and sold the notes, pocketing a commission. But the system served its intended purpose of enabling a circulating paper currency, though by the time of the Civil War, centralization and consolidation of banking was well underway.
Major banking centers grew up in locations where commerce and industry contributed to the capitalization of banks on a scale unknown in earlier times. The major banking centers were New York, Boston, and Philadelphia on the East Coast, and later, Chicago in the Midwest and San Francisco in the West. Over time, every American city that grew into a focal point of trade and manufacturing also became a banking center.
Social Consequences of Banking and Usury
Banking and usury can play out to baser motives, like greed and power. Putting other people into debt creates power relationships that degrade both parties. My wife Karen’s great-grandmother came to America from Wales as a teenager, after her parents lost their farm when they co-signed a loan to a relative who then defaulted. Such cases, and many far worse, are legion in the history of the modern world.
Debt for any cause, but particularly for a victim of usury, preys on the mind, saps self-confidence, is a source of fear and anxiety, and may drive a person to self-destructive behavior, including alcohol or drug abuse, depression, or suicide. We see examples all around us of young people shackled with debt from student loans, a situation made worse by the fact that student loan debt has been excluded from being written off through bankruptcy. We can thank former US Senator Joe Biden for that legislation.
Loan sharking is also one of the main abuses of organized crime, where debtors are threatened, hounded, or even murdered for inability to pay. Even in our day and age there are people who sell themselves into simulated or literal slavery to pay their debts or who prostitute themselves, their values, their time, or even their bodies for financial gain. Though often (but not always) greed is at their origin, usury causes or intensifies all these ill effects.
Even when debt is lawful, failure or inability to pay off a loan can be catastrophic, leading to default or bankruptcy. Individuals and families may lose their homes. If the debtor is a business, an institution, or even a nation, it may pass into receivership and possibly not even survive. Some believe the Roman Empire was driven to ruin by bad debts.
In every instance, usury creates an underlying tone whereby everything is seen only for its monetary value, where people lose touch with their real humanity. The family home becomes an investment, where the purchaser is waiting for an opportunity to cash in and move on when the market goes up. Every commodity that we purchase has built into its prices the interest required to repay money that has been borrowed at every stage of the manufacturing and distribution process. The entire system is infested with interest payments. It has been estimated that interest charges may account for up to fifty percent of retail purchase prices. And usury becomes the basis for creating a nation’s circulating currency, as there are few other ways to generate the purchasing power required for people to pay for the necessities of life.
This leads to two distorting mechanisms that a society can choose from when seeking to ameliorate its burden of debt. One is to spend money faster. This is called the “velocity” of money, where the faster that money is spent, the more economic activity a given monetary base can support. Of course, velocity slows down and may even stop if the money is sucked out of the community by big outfits like Walmart that pay their employees minimum wage while taking all it can as profit accruing to far-off owners or stockholders and provisioning its stock not just from the US but from global suppliers.
The other way to attack debt, as stated previously, is through inflation. If prices rise, debtors are at an advantage, as they can pay down their debts with money of lesser value compared to the original principle of the loan. Speaking again of homeowners, they are always in favor of inflating home values, though the situation backfires when local governments raise property assessments and rake in more on property taxes.
Of course, local governments love inflation. They know that the price of houses always goes up, almost never down. So does their tax haul.[1]
The same is the case with national governments. When governments go into debt, they do everything they can to generate inflation in order to pay down their own debts. When the government tells you they are “fighting inflation,” they are lying.
Over the last half century, since the huge deficits of the Reagan era, federal government debt in the US has skyrocketed. As night follows day, so has inflation followed debt, to the point where the value of the once sacrosanct US dollar is being reappraised by most of the world.
[1] I pointed this out recently to our town mayor. Of course he was indignant.