 Our first speaker this morning is Dr. Thomas Woods, who is a senior fellow here at the Ludwig von Mises Institute. And the topic of his lecture this morning is going to be on economic cycles before the Fed. Tom? OK. First of all, when we talk about 19th century American history, particularly the first half of the century, but really all throughout, we have to content ourselves, by and large, with qualitative statements about the economy because the statistics, such as they are, are either unreliable or non-existent in many cases. So I won't be citing a lot of statistics. But nevertheless, I think we can make some judgments. Several years ago, I published an article in the quarterly journal of Austrian economics called What Austrian Economics Can Teach Historians? History is actually my field. All my degrees are in history. I don't have any degrees in economics. I've just been studying it since I attended Mises University some years ago. And in that article, one of the points I made was that the historian who has some knowledge of the Austrian school has an advantage over his peers in many ways. And that one of those ways is that when studying economic cycles, he has the benefit of the Austrian theory of the business cycle. So in effect, he knows what to look for. He knows to look for credit expansion. And that's what I'm suggesting we do in the case of the 19th century because very often when you're talking about the Federal Reserve System, a critic will reply that indeed we had booms and busts before we had a Federal Reserve System. So doesn't that invalidate your case? If you're blaming everything on Alan Greenspan, I mean really, can you blame Alan Greenspan for the panic of 1819? You could try, I suppose. But I think it's better to suggest that really the same phenomenon is at work in both cases, that these panics are not any sort of difficulty for our position. I think a lot of work remains to be done on them from an Austrian perspective though. And at the end, I'm going to refer you to some resources where you can indeed get yourself up to speed on where we stand in our knowledge of these episodes. If you decide, in fact, to take this up for yourselves. Now Murray Rothbard, of course, wrote a book called The Panic of 1819, Reactions and Policies. That was published in 1962 by Columbia University Press. That was far and away Rothbard's most critically well received book. If you read the major historical and economic journals, they are full of praise for this book. And indeed, a recent, I suppose not super recent, but a book I read in grad school about Jacksonian America. Obviously Jacksonian America is a little bit after the panic of 1819. But nevertheless, in the bibliography, the bibliographical essay, the author Harry Watson, I think, says Murray Rothbard's book The Panic of 1819 is unlikely to be superseded. That's a completely mainstream treatment of the subject, saying that about the Rothbard book. So that means something. This is a real piece of scholarship. It's very well done. It's a model for how to do something like this. But Rothbard's initial idea, when he set out to work on this project for his doctoral dissertation, was not to confine himself to The Panic of 1819, but to do a study of American business cycles. Then he gets started on it, realized, well, that's obviously impossible in a dissertation. So it's very much like when he started to write his history of economic thought. He figured, OK, I'll write a 300 page history of economic thought. And then he realized, oh my gosh, there's so much to say. Or I'm going to write a history of the US. And four volumes later, he's just finishing the colonial period. So that's what happened with The Panic of 1819. But it's very well done. And the Institute reprinted it. And to our amazement, it sold pretty well for a book from 1962 about a panic nearly 200 years ago. So very significant. So it's a great analysis. And at the end, he's evaluating different responses to The Panic and what people proposed. And although the responses are all over the map, what's significant to me is that there was a substantial hard money contingent that drew hard money conclusions from The Panic of 1819. Well, I want to start a little bit before even this and say a little something about the initial purposes of national banks that were chartered by the US government. Because I want to make clear that what's called the first bank of the United States that was chartered in 1791, or the second bank of the United States that was chartered in 1816. They may be forerunners of the Fed, but they're not really central banks in the traditional sense of the term. Because their functions and their powers were much more modest. So these banks would lend to the US government, typical government central bank relationship. They would serve as a depository of the federal government's funds. And they would issue their own notes. Now they did not have a monopoly of the note issue, so other banks could issue their own notes. But the notes of the national bank had a certain prestige, because everybody knew that federal government deposited its money there, that gave people the sense that there was a certain stability to it, it enjoyed a federal charter. And these notes were also receivable in taxes. So that gave them a sort of quasi-legal tender status. That gave them an advantage that other banks' notes did not enjoy. Now the first bank of the United States, 1791, came about as the result of really what was the first major constitutional dispute in US history. Because the dispute was about whether the federal government had the authority to establish a national bank to begin with. And of course, this dispute involves Secretary of State Thomas Jefferson on opposing sides from Secretary of the Treasury Alexander Hamilton. Now the argument is fairly straightforward. Jefferson's view was that such a bank is neither constitutionally authorized nor necessary. Whereas Hamilton's view was that it is both constitutionally authorized and necessary. But Jefferson, any time you're dealing with a historical figure like Jefferson or Andrew Jackson or anybody else who was opposed to a national bank, historians are going to treat them like ignorant country bumpkins that you might treat with a kind of condescending sneer. If only they hadn't been such stupid, ignorant hicks, they would have understood the value of a national bank. Too bad Jefferson was so stupid and wasn't informed enough. To the contrary, Jefferson understood these issues and was much more informed about economic and financial issues than the much-vaunted Alexander Hamilton. And his view was that there's really no reason that banking can't just function like any other business. Why do we need to have some federally chartered national bank? Why can't it just be a bunch of banks providing money warehousing and financial intermediation services? What would be wrong with that? Why does there need to be this special privilege given? And Jefferson's main argument was there's no express delegation of this authority to the federal government in the Constitution. So unless we're just going to start down a road in which we have a blank piece of paper for a Constitution, we have to make a stand here and say, no, you can't have it. Hamilton, on the other hand, said that Jefferson's interpretation was certainly unreasonable, much too narrow, that, in fact, a national bank was necessary and that, indeed, it was implied in other powers granted to the federal government. And so it ought to be instituted and we should have no moral or constitutional scruples about doing so. Well, George Washington, of course, was president at the time and poor George Washington. I mean, I think, I know Rothbard is not too pleased with Washington in terms of his military capabilities and that's a separate matter. But I do think one can credit Washington with not having staged a military coup after the war was over. I mean, there were military and political figures around the world who were astonished at that. So I do recognize that one thing of Washington, but poor Washington really does not have much of an opinion on this national bank question. So he more or less takes the opinion of whoever was the last person to talk to him, that's the position that he takes. And then finally, he came to the conclusion, well, this is more or less Alexander Hamilton's area, right, I mean, he is the secretary of the treasury, so I'm gonna defer to his judgment and they went ahead and established the national bank. So that bank had a 20 year charter, which expired and was not renewed in 1811. Now at the time that that bank charter was not renewed, there were the usual suspects that we would have today. Imagine if the Federal Reserve were about to be abolished, what would we hear? Oh, this is gonna lead to just terror in the financial markets and contraction of credit and devastation throughout the land and so on. That's what we heard in 1811. Economy's gonna crash, it's gonna be the biggest disaster ever. And yet a contemporary noted in 1816, many persons viewed a dissolution of the late Bank of the United States as a national calamity. It was asserted that a general bankruptcy must follow that event. The fact was otherwise. Every branch of industry continued uninterrupted. No failures in the mercantile community were attributable to that occurrence. Well, of course, 1811 is one year before 1812 and the war of 1812. Now that war was between the United States and Britain and involved some longstanding grievances the US had against Britain. James Madison was president at the time, took this war very seriously. And one day when a British journalist happened to be within earshot of the president, he asked him what do your fellow countrymen in Britain think about this war they're engaged in with the US? And this journalist barely had the heart to tell Madison that most Britons were not even aware they were at war with the United States. It was so trivial to them. They weren't even aware that it was going on. And for Madison, like, this is my destiny in history to be waging this thing. But notice now that as that war goes on, there's no national bank. It went out of existence the previous year. And the banks in New England are not willing to lend the US government for war purposes. In New England, they're all dead set against this war. They begin calling it Mr. Madison's war. Partway through the war, most of the way through the war, some people in New England begin agitating for an amendment to the Constitution that would require a two-thirds majority for a declaration of war, to make sure that we don't find ourselves in situations in which the country has been led into war with a substantial minority opposed. So what wound up happening, and this is what Rothbard told us when I was at Mies's U years ago, he gave the opening lecture one night, he was talking about the history of American business cycles, and he told us, I'm the world's foremost expert in the panic of 1819. He says, I'm the only one who's written a book on it. So I thought, all right, fair enough, I guess, for him to say that. But he said that what basically happened was that other banks in other parts of the country sprang up, he said these were banks that had no money in them. These banks were just gonna issue paper, and this led to, of course, problems. So after the war, there was some agitation among the political class for another national bank. We need to have this institution, it's nice to have an institution that more or less will be counted on, can be counted on to lend to the US government. So that's what we got, Second Bank of the United States, 1816. But then three years later, we get the panic of 1819. Now are these things entirely unrelated, or could there be some connection? Well, it turns out that the Bank of the United States did indeed engage in what we would call an inflationary boom, the first couple of years of its existence, and the other banks did as well. Now why are these banks engaged in, and not just another national bank right now, leave that aside for a moment, but how come all just the whole run, the general run of banks, why are they engaging in artificial credit expansion? Why are they issuing more notes than they have precious metals in the vault and how do they feel like they can get away with this? And the answer is that with the passage of time, a precedent began to be established, that if a bank, or particularly if there's a series of banks, if there's a big problem of panic, find themselves in difficulties where they can't meet their depositors' demands, well then they could do what was called suspend species payments, species, this is the word for the precious metal, particularly the precious metal coins. They could legitimately, they could legally refuse to honor their depositors' requests for withdrawal. They could say, well look, we haven't got the money, maybe we'll have it in six months, maybe a year. Check back with us, check back with us two years from now, maybe we'll try and get you your money. Well, this obviously is a kind of subsidy to this behavior because if they're not required to close their doors when they can't deliver their depositors' money, then it encourages them to do more of this, to take more risks in the expectation of additional profit with the downside of being more or less socialized through this kind of special privilege. Well, as we'll see in later years, there were proposals that the banks, if they're going to get state charters, which indeed the banks did have to get state charters, that one of the provisions of those charters ought to be that at the first moment that you are unable to satisfy your depositors' request for withdrawal, you ought to be, you ought to be closed. That comes later. So this is a special privilege that the banks enjoy. Now I'm going to talk in a few minutes about some people in US history who kind of understood what was going on, both in the Panic of 1819 and the Panic of 1837, they understood what the correct narrative was, who the culprit was, what the economic phenomena at work were. And this is particularly noteworthy because as I say, historians portray these people as stupid hicks, almost by definition, you're a stupid hick if you're against the National Bank. Now, and then when I come back and say, but they did understand economics actually to a degree that I think we have no right to expect even, then in effect the next argument sort of becomes, but if they favor a hard money approach, if they favor a kind of a gold standard and no creation of fiduciary media, that by definition makes them stupid hicks because don't you know that we need paper money and all the cool kids are doing that? So it's very hard to win this argument with mainstream historians but who even cares? I mean, mainstream historians don't know anything about economics. Not even worth arguing with them. We want to reach the general public and leave the historians where they are. But one of the people I'm going to introduce to you at greater length in a few minutes is a New York editorial writer named William Leggett, L-E-G-G-E-T-T, Leggett was a Jacksonian. He was a great exponent of the Jacksonian philosophy and he wrote of the Panic of 1819. He said, for the two or three years preceding the extensive and heavy calamities of 1819, the United States Bank poured out its issues, that is its issue of bank notes, at such a lavish rate that trade and speculation were excited in a preter natural manner. Well, the lessons of the Panic of 1819 that many people drew at the time was that the economy gets taken on a wild and unhealthy ride when the money supply is dramatically and artificially increased and then suddenly, just as suddenly reduced. So even the political class managed to figure this out, some of them anyway. So there were some American statesmen and thinkers who were confirmed in their existing hard money views by the episode of the Panic of 1819 where an inflationary boom was followed by a terrible bust. So Thomas Jefferson asked a friend in the Virginia legislature to introduce his plan for, it was called a plan for reducing the circulating medium. Can you imagine somebody introducing that plan today? I want to reduce the money supply, right? That was the great thing about Mark Thornton's article on the debt ceiling. His article was called Lower the Debt Ceiling. I thought, yeah, good old Mises Institute. I always count on the exact opposite of what, but not just hold the line, reduce the darn debt ceiling. So Jefferson wanted to reduce the circulating medium. What his plan was, was to, over a period of five years, reduce, was to eliminate all paper money in excess of specie. So that from that moment on, the paper money and the specie would more or less be at a one to one ratio. And then at that point, just get rid of the paper money and just entire people have got to use the coins. That was his proposal. So there you are. And you're in the company of a crazed lunatic like Thomas Jefferson. How dare you have thoughts like this? John Adams felt the same way. Adams was very fond of a book called A Treatise on the Will by De Stuette de Trussie. He was a French theorist. Adams called it the best book on economics ever written. He said that the chapter on money, quote, defends the sentiments that I have entertained all my lifetimes, a very hard money book. Jefferson wrote the preface to the English language edition. And I believe it is available at Mises.org. And then other people, so these are people who were sort of confirmed in their existing views. Other people were converted to the hard money cause by having observed firsthand what had overtaken the country when this great inflation of banknotes occurred. And then the bust took place in 1819. So a guy named Condi Rage, and this guy's name is R-A-G-U-E-T was an inflationist. And an outspoken one until 1819. And then his mind was changed after the panic of 1819. And he went on to write A Treatise on Currency and Banking in the late 1830s into 1840. And that's also available from the Mises Institute. You can read it online just to see what hard money people were writing at that time. These books that were written, I mean that I could also mention a short history of money and banking by a guy named William Gouge. His book is also in the bookstore and on Mises.org. These books actually still have more or less stood the test of time. They're still very good treatises on these subjects. And the Gouge book contains a lot of very useful U.S. history, history of money and banking. So it's almost like the only good banking historian is a dead banking historian, it seems like. But we also have a Davy Crockett, a future president, William Henry Harrison. And at least for a time, John Quincy Adams, who was also a president for a while, who also came out in opposition to inflationist banks. In contrast to the inflationary second bank of the United States, Adams proposed the hard money bank of Amsterdam as a model. The first treatise on economics published in America was Thoughts on Political Economy by Daniel Raymond, who was a disciple of Alexander Hamilton. Hamilton was not 100% reserve guy. He did believe in fractional reserves. And Raymond, who very much admired Hamilton, dissented from Hamilton on that point and advocated a hard money, 100% specie-backed currency. So these are the sorts of lessons and policy proposals that are coming out of the panic of 1819. Rage actually proposed a forfeiture of a bank's charter if a bank's notes or deposits were not redeemed on demand. So that's an example of what I was alluding to earlier. Also people had a kind of rudimentary, some of them anyway, economic view or monetary understanding of what was going on in the country. How this sequence of inflationary boom followed by bust took place. What were the actual mechanisms of it? And more or less what they concluded was that we had bank credit inflation presided over and participated in by the Bank of the United States or we could call the Second Bank of the United States. And the result of that was an increase in prices in the U.S. When there's an increase in prices in the U.S., people, as you know, these will be mechanisms that are quite familiar to you, when there is that increase in U.S. prices, people are less likely to buy goods in the U.S. Prices are gone up. They're more likely to buy products outside the U.S. So Americans are going to reduce their domestic purchases and increase their foreign purchases. So when they do that and they begin purchasing things from abroad and importing more, those people who are located abroad, who are the sellers or who are the financial institutions, they don't really want U.S. banknotes. They don't circulate there. So they're gonna take those banknotes and return them to the U.S. for redemption into specie. And that's the moment where the banks which have, of course, issued notes in excess of specie begin to grow concerned. They won't be able to meet their obligations and so they begin contracting. They call in loans and they diminish the number of loans they're going to initiate. And this winds the whole cycle back down again and that's more or less how it occurs. And so the conclusion from this was if we hadn't engaged in the inflation in the first place then we wouldn't have had to deal with this cyclical problem. So I mean, that's not quite the Austrian theory of the business cycle, but for somebody writing in 1819 it's not totally stupid either. And it's not, and Americans didn't originate that idea but a lot of them I think more or less developed it independently of the currents of economic thought existent at the time. But what perhaps is the most memorable episode in U.S. history in the 19th century anyway with regard to this comes a little later. Oh, I do want to just share one quick thing before I move on. I like this, the New York Evening Post writes, right around the time of the Panic of 1819, time and the laws of trade will restore things to an equilibrium if legislatures do not rashly interfere in the natural course of events. That's pretty good, right? Pretty reasonably sophisticated. But the second major episode, a significant one that involves a downturn occurs in the 1830s and this is tied together with Andrew Jackson's war against the second bank of the United States. Andrew Jackson is elected U.S. president. I mean, I know some of the American students will know this, but from all over the world I don't expect you to and would be slightly creeped out if you knew all the U.S. presidents. I mean, there are so many things in this world to go out and enjoy that if you're confining yourself to memorizing presidents, it's just a terrible outrage. But Jackson was elected in 1828 and served two four-year terms. Jackson was a hard money man from the start of his tenure. He had advocated hard money in Tennessee. He had blamed the Bank of the United States for the Panic of 1819. So he's very much in the mainstream of this hard money tradition that I'm describing to you. So when he takes office, he has several reasons that he wants to move against the second bank of the United States. And again, I insist to you that if you read a typical U.S. history, a textbook, the account of Jackson and his war on the Bank of the United States portrays him as a complete moron. He's just an idiot who just doesn't understand all the benefits of a national bank. He had his reasons and some were economic, some were not. One of them was ideological philosophical and that involves the Jacksonian slogan of equal rights. Now what the Jacksonians meant by equal rights is not what the mainstream of U.S. politics today means by equal rights. Today equal rights means if you are thought by the political class to be disadvantaged in some way, then equal rights means we grab somebody's loot and hand it to you and that makes you equal. That was not what the Jacksonians meant. The Jacksonians did not mean that to bring about equal rights we take from one group and give to another. Their view was we don't take from any group and give it to anybody else. Nobody gets a thing, that's equal rights. And Jackson thought that was the best way that the interests of the working man can be vindicated. Not by giving him ill-gotten loot but by not privileging other people, by not privileging the business or mercantile class, just giving everybody an opportunity to advance himself. The way the U.S. banking system was operating was offensive to this principle of equal rights in the eyes of some Jacksonians, precisely because of the privilege of the suspension of species payment. There was no other industry that was allowed to operate on such a basis. A dry cleaner can't say to you when you come to pick up your pants, look your pants are really cool and I've been wearing them for like a week. So come back in like four or five weeks and maybe I'll give them to you. No one's allowed to operate like that. You would have to close your doors, you'd be sued, whatever, something would happen. But instead, there's a special privilege granted to banks. Now every year, when we happen to tune into that movie, it's a wonderful life. I ruin this for my wife every year I ruin it because the Jimmy Stewart character is saying, oh, I don't have your money, heritage, and French house and whatever. And I'm saying you rotten fractional reserve banker. I mean, look, and of course there's a great Simpson's parody of it's a wonderful life where Moe Sislak is in line trying to get money and a hair, I don't have your money, heritage and French house and Moe turns around and said, hey, what's my money doing in your house, Fred? And he belts him in the face. So I just drain all the fun out of everything basically. So that was the argument that if we believe in equal rights, it also applies to banking. So that's a very subversive idea. Secondly, of course, Jackson reiterates the constitutional argument that I made earlier and I won't dwell on. Although I will point out to you that the Supreme Court had since said it was okay constitutionally for there to be a national bank established. So who does Jackson think he is to continue to say, no, no it isn't? Well, Jackson in his veto message, I'm gonna give away that he is gonna get rid of the bank. But when the bank makes an early request for its recharter in 1832 and he vetoes it, in his bank veto message, he specifically says that it's not my responsibility as president to uphold the constitutional law handed down by the Supreme Court. It's my responsibility to uphold the constitution, which is a different thing. So he couldn't care less that some jerks on the Supreme Court said it was okay. I also, every branch has the responsibility to uphold the constitution and I say it's not. So I'm gonna veto the thing. All right, so those are a couple of arguments. He says in his initial message to the country, both the constitutionality and the expediency of the law creating this bank are well questioned by a large portion of our fellow citizens. And it must be admitted by all that it has failed in the great end of establishing a uniform and sound currency. He also believed that economically, the bank was not necessary and it caused a kind of derangement of the economy. Now we've already talked this week of course about the Austrian theory of the business cycle. So you've noticed that I haven't gone into that here because I don't think there's any need to belabor that point that's probably well, very much in your heads, but somebody who might watch this later is well advised to watch one of the Mises.org videos on the Austrian theory of the business cycle to understand the precise nature of the derangement that's brought about in the economy by artificial credit expansion and why it leads to a configuration of the economy that can't be sustained in the long run and has to culminate in a bust. But it's interesting to note, again, I wanna share with you just a few quotations from Jacksonian monetary theorists. Just to make clear, these are not morons. It's not that they don't understand the banking system. They obviously understand it all too well. So William Gouge says, why should ingenuity exert itself in devising new modifications of paper banking? The economy which prefers fictitious money to real is at best like that which prefers a leaky ship to a sound one. And then I love this sarcastic remark that he makes. He's talking about what would happen if we got rid of the Bank of the United States? Like would the earth go tumbling toward the sun? Like what would happen? And he assured Americans that quote, the sun would shine, the streams would flow, and the earth would yield her increase if the Bank of the United States was not in existence. So you can see that even he at that time in the 1830s had to deal with exactly what we deal with today. The world would end. We'd revert to barbarism. Wolves would run free in the streets if they weren't for the central bank. He had to deal with that at that time too. Now William Leggett whom I mentioned earlier, I wanna share some thoughts from him. Now Leggett, I'm gonna refer you to a book that's not in the bookstore, it's published by Liberty Fund. There's a great collection of Leggett's editorials and they're not all on banking. Some of them are on slavery. He was a great opponent of slavery. And some of them are just on abstract philosophy and he's a pretty good political philosopher I think, certainly compared to most editorial writers today. I don't think we can dignify them by calling them philosophers. But Leggett's writings have been collected in a nice volume by Larry White and it's called Democratic Editorials but they're spelling it the old timey way, Democratic with a K, Democratic Editorials. And really, I'm just almost picking these passages at random. You'll find, you can mine tremendously valuable testimony regarding this material in that little book. But Leggett memorably calls for, and this is his phrase, the separation of bank and state. You know, yeah, yeah, church and state, yeah, yeah, it's sort of old hat. Bank and state, right? The money, we wanna get the state out of that. So Leggett speaks as follows, talking about the second bank, which by the way, the second bank in the 1820s, there were years when it was not so inflationary. So I'm not saying that it was just nothing but a printing press, but he says this. Let us cast a glance at the manner in which the United States Bank regulated the currency in 1830. When in the short period of 12 months, it extended its accommodations from 40 to 70 millions of dollars. This enormous expansion, entirely uncalled for by any peculiar circumstance in the business condition of the country, alas, he is not entirely sound, was followed by the invariable consequences of an inflation of the currency. Goods and stocks rose, speculation was excited, a great number of extensive enterprises were undertaken, canals were laid out, railroads projected, and the whole business of the country was stimulated into unnatural and unsalutary activity. But I must also share with you his testimony from 1837, the year of course of the Panic of 1837, in order to know what in his mind was the connection between inflationary bank credit and the calamity that struck the country. He wrote, and this is, I put this in Meltdown, this is my book from 2009. He says, what has been whatever must be the consequences of such a sudden and prodigious inflation of the currency, business stimulated to the most unhealthy activity, a vast amount of overproduction in the mechanic arts, a vast amount of speculation in property of every kind and name at fictitious values. Obviously we wouldn't know anything about that. And finally, a vast and terrific crash when the treacherous and unsustainable basis crumbles beneath the stupendous fabric of credit and the structure falls to the ground, burying in its ruins thousands who exalted in the fancied security of their elevation. Men nowadays go to bed deeming themselves rich and wake in the morning to find themselves stripped of even the little they really had. They count deluded creatures on the continued liberality of the banks whose persuasive and treaties seduced them into the slippery paths of speculation. So we might, in our own day, think of house flipping or the housing bubble. But they have now to learn that the banks cannot help them if they would and would not if they could. They were free enough to lend their aid when assistance is not needed, but now when it is indispensable to carry out the projects which would not have been undertaken. But for the temptations they, the banks, held forth, no further resources can be supplied. Well, that is very interesting because that's very suggestive of the idea that capital projects or long-term consumer projects, let's say, that are interest rates sensitive or undertaken. And then as we know, as a result, input prices will tend to rise. Well, then additional bank credit is necessary to carry out the projects. And these are projects that wouldn't have been undertaken if it hadn't been for the cheap and artificially attractive terms the banks were offering in the first place. I mean, this is sort of proto-Austrian here from just some editorial writer in the 1830s. Then he writes, several months later, he says, any person who has soberly observed the course of events for the last three years must have foreseen the very state of things which now exists. He will see that the banks have been striving with all their might, each emulating the other to force their issues into circulation and flood the land with their wretched substitute for money. He will see that they have used every art of cajolary and allurement to entice men to accept their proffered aid, that in this way they gradually excited a thirst for speculation, which they sedulously stimulated until it increased to a delirious fever. And men in the epidemic frenzy of the hour wildly rushed upon all sorts of desperate adventures. They dug canals where no commerce asked for the means of transportation. They opened roads where no travelers desired to penetrate and they built cities where there were none to inhabit. All right, so there, I'm writing it, insert your own examples from Doug French's presentation the other day. So there are constitutional arguments, there are philosophical arguments, there are economic arguments. There are also arguments, political arguments, there are concerns at the potential for corruption and abuse when one institution or indeed one man holds the kind of authority that the president of the Bank of the United States held. Who was the president of the Bank of the United States? Nicholas Biddle, of course. The name, it's not like Nicholas Nickelbeam, it's right out of Dickens, right, Villain coming in, Nicholas Biddle, who in some ways had the temperament of a modern Federal Reserve chairman. I mean, he wanted the bank's activities to be above politics, but in practice he was very attuned to politics. He really held people who were not directly connected with the bank in a really shocking contempt and treated them quite condescendingly. Now the charter of the bank set to expire in 1836, a 20-year charter. But Biddle is persuaded by Henry Clay of Kentucky, who was a congressman and later a senator, to apply for an early renewal of the bank's charter before the election of 1832. And the strategy here was that after the election of 1832, with Jackson safely back in power, Jackson will have much more leeway to abuse the bank and refuse to renew it and whatever. But now if we sort of force him to take a position right around the time of the election, he won't risk taking such an outrageous position and he'll renew the charter. And this was a gross miscalculation. It was just thought that there's no way Jackson's gonna rally public opinion against the second bank of the United States, but indeed he could, and he rallied them with a populist appeal against him. So the charter was indeed put up for early renewal in 1832, mid-1832. Biddle said, we have determined on applying to the present Congress for renewal of the charter. And he claimed this had nothing whatsoever to do with elections or the president. I mean, we're national bankers. We're totally above whatever's going on in politics. We're not even paying attention. I know nothing about it, meaning the president's election, and care nothing about it, okay? However, Biddle then not taking anything for granted and not leaving this up to chance, approached newspapers and newspaper editors with articles that had been written in favor of a renewal of the bank's charter and urged them to publish them. And when I say urged them, I don't mean he went and said, hey, it'd be really super if you published this article. This is what I mean. Quote, this is Biddle. If you will cause the articles I have indicated and others which I may prepare to be inserted in the newspaper, I will at once pay to you $1,000. Ooh, that's a little bit more than saying I'll be your best friend, right? And it turns out that's like $22,000 today. Wow, for running some articles. Wow, we, so that's the sort of thing that Jackson could say, you see what I'm saying, right? I'm not imagining this. This is what I'm talking about, right? So again, there's this sense that Jackson is just a stupid idiotic conspiracy theorist who sees corruption where there is none. Well, all right, well, let's continue to evaluate it. One of the strongest supporters of the bank in the US Congress was Daniel Webster. Webster began as a US congressman from New Hampshire, then was at a US congressman from Massachusetts, then was a senator from Massachusetts. And Webster had initially been very much an opponent of the bank's charter, but then he became a strong supporter after being added to the payroll. So during the controversy over the renewal, and Webster was very much an advocate for the renewal of the charter, he wrote to Nicholas Biddle and said, I believe my retainer has not been renewed or refreshed as usual. If it be wished that my relation to the bank should be continued, it may be well to send the usual retainers. Oh, okay, like you're supposed to say that to him in person. You don't write that down. All right. So the bill to renew the bank's charter passes both Houses of Congress and Jackson vetoes it. So it turns out that, as I said, this was a great miscalculation. Well, then in the spring of 1833, so the bank, even though its charter is not renewed, remember it still is gonna exist until 1836, then after that, it's no longer a federally chartered bank. It continues as a state chartered bank for five years and then goes bankrupt, that's the end of it. But in the spring of 1833, Jackson engages in stage two against the bank, which is to remove the federal deposits. Remember that was one of the functions of a national bank. It holds the deposits of the federal government. He's gonna remove them. This means he's taking the funds away from them as a base for credit expansion on their part and also he's removing from them the prestige of safeguarding them. And Biddle had thought there was no way Jackson was going to carry that out, but indeed he did and there is some evidence that Biddle tried to punish the president for this by engaging in contraction of the money supply and calling in loans and causing great difficulties. Now, of course, the expansion of the money supply in the first place was the problem. So strictly speaking, contraction is not so much the problem, but nevertheless, the idea that you had one man who could do this and cause some distress in various sectors of the economy again seemed to people like this and using this as a kind of threat here, extortion, that this seemed again to confirm that there was the risk of abuse inherent in the system. Okay, now finally, Biddle decides that the thing to do at this point is to shore up his position by trying to offer as many congressmen as he could paid positions in the bank so that then they would speak up more vigorously against what the president was doing. So Biddle boasted that in half an hour I can remove all the constitutional scruples in the District of Columbia. And he says a dozen cashier ships, 50 clerk ships, 100 directorships to worthy friends who have no character and no money. And so indeed, he more or less tried to engage in this. And so finally, this continued to be a victory for the president. He got the charter to be not renewed and he got the deposits removed and placed in state banks but there was one moment during the sequence of events that Jackson was actually in a sick bed and he attributed his sickness to the machinations of the bank and he said to his president, Martin Van Buren, the bank is trying to kill me. I will kill it. And he did it, he did it. Now, having said this, the usual sort of response from historians is, well, because he got rid of the Bank of the United States that's why we had the Panic of 1837. If you don't have a national bank, it's all just terrible, everything's terrible. So like there's no causal mechanism usually presented. It's just he got rid of the national bank and then there was a panic. So I don't know, I guess it must be one led to the other. Like there's no theory involved at all, just a bunch of events and they try to correlate them. So what exactly did happen here? Well, one of the most common explanations for what happened in the Panic of 1837 was that with the closing of the second bank, there were fewer restraints now on the inflationary issues of the state banks. And indeed, by placing the deposits in the state banks, they served as the base for credit expansion in the state banks. And so you had inflationary boom because of that and that led to a bust. Well, okay, that's gonna be the criticism. Well, that's a proto-Austrian view. I'm perfectly willing to accept that. But the policy proposal that is said to follow from this is that we need a giant national bank to oversee state banks to make sure they don't do this. Okay, well, what if you just actually just got rid of all the special privileges for the state banks and made it more difficult for them to do this? That was the approach that some of the hard money people took. They wondered, is it really good to try to correct the errors of the state banks by erecting a gigantic bank that will have the same powers of derangement that the smaller banks have, that won't necessarily act as a police of the smaller banks, but will inflate in tandem with them. This is not necessarily the best approach. So in Delaware, Senator William Wells had been unconvinced from the start that this was the way to go. That the way to keep the state banks in line was to have a gigantic bank to watch over them. But this gigantic bank would be founded on the same principles and could also engage in artificial credit expansion. So he had said from the beginning of the second bank, this bill came out of the hands of the administration, supposedly for the purpose of curtailing the over issue of bank paper and yet it came prepared to inflict on us the same evil with this new bank being itself, nothing more than a simple paper making machine. And constituting in this respect, a scheme of policy about as wise as hiding oneself in the water for fear of the rain. The disease it has said is the banking fever of the states and this is to be cured by giving them the banking fever of the Bank of the United States. Samuel Tilden, a hard money US Senator of New York, likewise wondered how could a large bank constituted on essentially the same principles be expected to regulate beneficially the lesser banks? Has enlarged power been found to be less liable to abuse than limited power? Has concentrated power been found less liable to abuse than distributed power? So that's why the real hard money alternative to the second bank was not Jackson's approach. Certainly non-renewal is fair enough as far as it goes, but the removal of the deposits and then placing them in the state banks was not the hard money approach. A much better solution recommended by hard money advocates at the time is what became known as the independent treasury. So in that case, with the independent treasury, the federal deposits would be kept out of the state banks and would be retained by the treasury. They would be removed from the banking system altogether. Hard money supporters believed that the federal government was propping up this unsound system of artificial credit expansion and fractional reserve banking by distributing the federal deposits and providing a pyramid on which credit expansion could take place by accepting these banks' money and payment of taxes and thereby giving these banks notes special privileges and a special kind of prestige, a higher value, because if you can pay these notes in taxes but not other notes, then they're more valuable to you. This gives them an artificial advantage and also paying these notes back out again. So stop doing that. So Gouge said, if the operations of government could be completely separated from those of the banks, the system would be shorn of half its evils. If government would neither deposit the public funds in the banks nor borrow money from the banks and if it would in no case either receive banknotes or pay away banknotes. Okay, now the Independent Treasury Act briefly existed in 1840, but it was repealed and then it was in 1846 that we got the independent treasury for about 15 years. What's interesting about this, this would be the exact opposite, the exact opposite of what the establishment would call for today. I mean, people would have to be hospitalized if you propose this to them today. And yet it may have been the best, most stable monetary system the United States has ever had. This is, that was the judgment of Jeff Hummel. I think there are good grounds for this. For example, it's interesting to note the Mexican War, which began in 1846, remains the only war in US history that was not at least partially financed by paper money inflation. There was a much smaller relationship, a greatly diminished relationship between the federal government and the banks at this point. There was more or less separation of bank and state. So taxes and borrowing more or less funded this. It was not just paper money inflation. And it's interesting to note that the two major US wars that were sort of bookends of the Mexican War, the War of 1812 and the Civil War, in each case we saw massive inflation, the suspension of species payments, and a wartime economic boom that was followed by a bust. But we did not see any of these phenomena after or during the Mexican War. Secondly, we did have something called the Panic of 1857. Now when you're dealing with critics, almost none of them know any individuating characteristics of any of these panics. They're all terrible and unspeakable and the worst things ever and much worse than the Great Depression or whatever. Like I was answering a critic who referred to the Panic of 1857 as a howling depression. A howling depression that lasted for six months. I mean, that must have been an intense six months. It was actually probably the most mild of the downturns of the major ones that we remember anyway. And again, we can attribute this to, there was still artificial credit creation taking place but on a much smaller scale. And in fact, James Buchanan, who was president at the time, said, it is apparent that our existing misfortunes have proceeded solely from our extravagant and vicious system of paper currency and bank credits. It's astonishing that people were drawing these conclusions. The money supply fell, interest rates rose, government spending did not increase and nobody was bailed out and yet the thing was over in six months. And Buchanan warned Americans that quote, the periodical revulsions which have existed in our past history must continue to return at intervals so long as our present unbounded system of bank credits shall prevail. And Buchanan envisioned and proposed a federal bankruptcy law that would not support the suspension of species payments but would in fact shut them down when they were unable to satisfy depositor demands. And he said, the instinct of self-preservation might produce a wholesome restraint upon their banking business if they knew in advance that a suspension of species payments would inevitably produce their civil death. Now finally, just a brief word about what happened in the 1870s. Now for a long time we were told the 1870s were a period of what was called the long depression. This long depression was said to have lasted from 1873 to 1879 in the more moderate tellings of the story. And from 1873 to 1896 in the more outlandish ones. Well it turns out that in recent years historians have more or less come to the conclusion that this was a mistake. This was a misreading of the evidence. There was in fact no long depression of the 1870s. I wanna read you a quick passage from the New York Times and then also a little something from Milton Friedman. Here's the New York Times from just a few years ago. It's astonishing, I mean I wanna point this out because when once every 150 years they're right about something I wanna give credit where it's due to the New York Times. So they write, recent detailed reconstructions of 19th century data by economic historians show that there was no 1870s depression. Aside from a short recession in 1873 in fact, the decade saw possibly the fastest sustained growth in American history. It's a good old economic historian, they're exactly 100% wrong. Employment grew strongly faster than the rate of immigration. Consumption of food and other goods rose across the board. On a per capita basis almost all output measures were up spectacularly. By the end of the decade people were better housed, better clothed and lived on bigger farms. Department stores were popping up even in medium sized cities. America was transforming into the world's first mass consumer society. Milton Friedman and Anna Schwartz in their monetary history of the US that came out in 1963 also sort of had an instinct that something wasn't quite right in the traditional telling of this. Now Rothbard had it right absolutely in his history of money and banking in the US. That collection edited by Joe Salerno, he gets this right completely. He said there clearly is no downturn. Historians are just concluding that because prices fell by roughly 3.8% a year things must have been terrible. There's no reason that that would make things terrible. And here's Friedman and Schwartz. The contraction was long and it was severe. Well, all right. He says but the sharp decline in financial magnitudes so much more obvious and so much better documented than the behavior of a host of poorly measured physical magnitudes may well have led contemporary observers and later students to overestimate the severity of the contraction and perhaps even its length. And he goes on but a little bit low on time here. It is also worth noting that the bank panics after the civil war or war between the states between then and 1913 are a phenomenon that really were a curiosity in the rest of the world. There were no such panics in Canada. This was not something that was striking the whole world. Part of the reason for it in the US at least part of it involves the unit banking regulations that existed at the state level that said that every bank could have only one office. No interstate or intrastate branch banking is allowed. And that made every bank very vulnerable to local swings extremely fragile and undiversified. And so you see waves of difficulties that you don't see elsewhere where these regulations do not exist. And it's interesting to note that in even during these pre-fed bank panics the losses depositors suffered were relatively low. They amounted to only 0.1% of GDP during the panic of 1893 which was the worst of them all. By contrast, just in the past 30 years of the central bank era, the world has seen 20 banking crises that led to depositor losses in excess of 10% of GDP. And half of those losses were in excess of 20% of GDP. With as much more that can be said about this we could talk about the fed's real record because supposedly these panics were terrible and they were caused by the free market and the fed has given us no panics and shorter and shallower recessions. None of that is true. And so to pursue this topic further particularly if you wanna carry it out in your own research or learn more about it or some of that stuff I just said about the fed last night before bed I made a page on my website with links that can at least get you started on these topics to articles that I think are very worthwhile and that will help you and will give you information that nobody in your class will have. And that's tomwoods.com slash panics. So check that out and thank you very much.