http://atimes.com/atimes/Global_Economy/FL17Dj01.htmlThe nature of money has been a controversial issue since the founding of the United States. The founding fathers recognized that the people's power to issue money was fundamental to the functioning of democracy, while the Federalists led by Alexander Hamilton advocated the need of a national bank controlled by the moneyed elite to support the development of the newborn nation's economy. Unlike Thomas Jefferson, who wanted to create a new, revolutionary democratic nation, Hamilton wanted to build a powerful new nation that would rival Britain, its former oppressor. Hamilton turned the American Revolution from a struggle to form a new democratic society as envisaged by Jefferson toward an oligarchic secession from Britain. Yet Hamilton's national bank was partially state-owned, quite unlike the Federal Reserve System, which is wholly owned by private banks that have usurped the people's sovereign power to create money.
The first national bank, modeled after the Bank of England, which had been instrumental in the emergence of the British Empire, was established by Federalists as part of a nation-building system proposed by Alexander Hamilton, the first secretary of the US Treasury, who realized that the new nation could not grow and prosper in a competitive world without the full application of sovereign credit with a sound financial system mediated through a national bank chartered, partially owned and fully controlled by the central government. The first national bank in the US was the Bank of the United States (BUS), which was founded in 1791 and operated for 20 years, until 1811. A second Bank of the United States (BUS2) was founded in 1816 and operated also for 20 years until 1836.
The national-bank charter was approved by Congress and signed into law by president George Washington in 1791 when the federal government of the new nation was only three years old. The new Bank of the United States was to handle the finances of the federal government. It held the government's funds and dispensed sovereign credit through the issuing of notes that would circulate as legal tender. The national bank was to maintain an adequate supply of stable money and extend sovereign credit to support an industrial policy to promote national economic expansion without having to succumb to foreign, mostly British, financial domination.
To understand the thinking behind Hamilton's proposal for a national bank, it is necessary to remember that the Treasury was restricted by law to limit its issuance of money to the coinage of gold and silver, and not to print paper money. According to the Quantity Theory of Money, specie (gold- or silver-backed) money was the only reliable currency, though it could be supplemented by banknotes fully and freely redeemable for gold or silver. Thus sovereign credit was limited by the amount of gold held by the Treasury and a national bank was needed to create money through partial reserve. Congress granted a 20-year charter for the BUS despite arguments by Jefferson that the constitution did not give Congress power to establish a national bank and the charge that the national bank was designed to favor mercantile interests over agrarian interests, and the rich over the common man, in the name of national interest. Jefferson believed that the path to a strong nation was through the cultivation of a strong citizenry of independent wealth, not a strong central government led by a financial elite who would control the nation's money supply for narrow sectional and class benefits at the expense of the general population.
The federal government subscribed one-fifth of the US$10 million capital of the BUS, with a loan of $2 million immediately advanced from the BUS to the government, with the remaining $8 million subscribed by private investors. The BUS acted as the exclusive fiscal agent for the government and also conducted commercial banking business. Despite being well managed and financially profitable, the BUS antagonized state-chartered banks and western frontier and southern agrarian interests, which formed a coalition that successfully blocked its rechartering in 1811.
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