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The Essence of Liberty #109, Chapter 14: The Great Inflationist

July 27 2007 at 6:09 PM
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he Essence of Liberty, Part 109

A Summary of: Lincoln Unmasked: What You're not Supposed to Know About Dishonest Abe by Thomas J. DiLorenzo

Summarized by Toni Jolin

Edited by Dr. Jimmy T (Gunny) LaBaume

Chapter 14: The Great Inflationist

When Lincoln first entered Illinois politics in 1832 he announced a national bank as his first priority. The big political showdown over the re-chartering of the bank of the United States (BUS) also took place in 1832. A national bank was the lifeblood of the Whig Party. The Party always intended to use a national bank (and the printing of paper money) to finance the patronage schemes that they believed would keep them in power indefinitely. And as Michael Holt put it, “Few people in the party were so committed to its economic agenda as Lincoln.”

Andrew Jackson considered paper money to be “the instrument of the swindler and the cheat.” He feared that a central bank would be controlled by Northern bankers to be used to manipulate politics and would be a detriment to the economy and the public. He also believed that, in light of states' rights, a national bank was unconstitutional. The Supreme Court eventually disagreed.

Jackson had good reason to fear a politically manipulated central bank. The first president of the BUS, William Jones, had no banking experience. However, he was well connected politically. Murray Rothbard blamed Jones for creating the “panic” that caused America's first serious depression. The banks second president, Nicolas Biddle, continued to politicize the bank by granting below-market interests rate loans and “consulting contracts” to members of Congress who supported the bank. These funds were essentially political “kickbacks” paid with taxpayer dollars deposited in the BUS. Biddle further confirmed Jackson's charges of political corruption when, during the 1828 national election, he spent more than $100,000 of the bank's deposits to support Jackson's opponents.

At the time the Supreme Court was not yet the final arbiter of constitutionality as it has been since 1865. So, when the Court issued the opinion that the BUS was constitutional, Jackson essentially said “thank you for your opinion, but my opinion is different –and equally valid.” He then proceeded to de-fund the Bank but the rhetorical battle would continue for decades.

The demise of the BUS led to the Independent Treasury System, known as the “free-banking era.” This would be the prevailing banking system until Lincoln ended it in 1862.

One of the major issues during the banking debate was whether or not currency should be redeemable in gold or silver. The Jeffersonians believed that, if money was not redeemable in specie, it was essentially counterfeit and would invariably lead to economic hardship. To the contrary, the Whigs (and later the Republicans) were obsessed with political power through patronage financed by the printing of paper money.

Lincoln was stringently opposed to the Independent Treasury System because it robbed the Whigs of the ability to finance their corporate welfare giveaways with paper money. He gave a long-winded speech in December of 1839 that was a fiery denunciation of the system. Much of this speech was simply absurd. For example, he claimed that requiring banks to hold reserves of gold or silver would cause “all {will} suffer more or less, and very many will lose everything that renders life desirable.” Lincoln was not a religious man. In fact, he never joined a church and never admitted to having become a Christian. However, he was masterful at invoking religious rhetoric in his political speeches. He did so in this one when he implied that Independent Treasury System was traitorous to the American public “just as Judas had betrayed Jesus Christ.”

With the Independent Treasury System the Whigs were unable to deliver patronage. They also failed to deliver protectionist tariffs. The party imploded and its constituents who favored protectionism, corporate welfare, and national banking became Republicans. Then, when Lincoln became president, he “immediately raised tariff rates ten times, commenced the building of a government-subsidized transcontinental railroad, and replaced the independent Treasury System with a nationalized money supply.”

The National Currency Acts of 1863 and 1864 ended, once and for all, the separation of money and state in America. As paper money flooded the banks, dollars became so devalued that by July 1864 they were worth only 35 cents in gold. Furthermore, a few Wall Street banks that were closely affiliated with the Republican Party issued almost all currency. Lincoln and his party knew that the nationalization of the money supply was an essential weapon in their crusade to abolish Jeffersonianism, centralize government power, and finally “implement the Hamiltonian system of protectionism, national debt, nationalized banking, and corporate welfare.”

In the words of Heather Cox Richardson, “The result was…to utterly destroy the rights of the states. It is…a power which if carried out to its logical result would enable the national Congress to destroy every institution of the States and cause all power to be concentrated here (in Washington DC).”

“The party of Lincoln set out to fundamentally transform the American government from a decentralized confederacy of sovereign states to a consolidated, monolithic empire that could interfere with the affairs of other nations. They succeeded, and the nationalization of the money supply was …an indispensable component of their success.”

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At the time this work was completed, Toni Jolin was a student in the School of Agricultural and Natural Resource Sciences at Sul Ross State University where Jimmy T. LaBaume, PhD, ChFC is a Professor of Economics and Statistics.

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