Practice free trade. Avoid government debt. Keep the government and the banking system separate from each other. These quaint and long-rejected policies were Condy Raguet’s prescription for American peace and prosperity. Now largely forgotten, Raguet (1784-1842) was one of our earliest and best political economists. Unlike some later advocates of a free economy, Raguet was not a rabid individualist who disdained social obligations. Far from it. Nor did he advocate laissez-faire as a pretty theory that would make us all rich. Rather, he argued knowledgeably and eloquently that economic freedom was the doctrine most compatible with American institutions.
Government interference in the economy inevitably profited some, destroying the republican equality of citizens and turning politics into a scramble for advantages. Also, in a large country with diverse interests, such actions always profited one region at the expense of another, violating the comity that ought to characterize a federal union.
We have on good authority that the love of money is a cause of evil. It is also nearly universal. Contra the Marxists, economics does not explain all of human behavior, but it would be a mistake to underestimate its importance in understanding history and current events. “Money,” a measure of wealth, is inextricable from such matters as how much credit is available in an economy and at what rate of interest; government spending, taxation, borrowing, and debt; conditions of trade (the facilitation of trade being the origin and most legitimate use of money); and the prices that we all pay for goods and receive for our labor. Further, an increase or decrease in the value of money (deflation/inflation) critically affects our well-being. Though usually not recognized as such, control of the money supply is the most basic and pervasive power in society, more important even than the sword.
Money winds through the history of these United States. “Not worth a Continental,” describing the paper promises that in part financed the War of Independence, played a large role in persuading the states to establish the U.S. Constitution. Alexander Hamilton thought that banks and the government’s alliance with them were necessary for prosperity, while Thomas Jefferson warned that banknotes, the money invented by banks, would become as plentiful and as worthless as oak leaves. Andrew Jackson considered a national “Monster Bank” to be a threat to the public good, while William Jennings Bryan avowed that Americans must not be crucified on a cross of gold. “Greenbacks,” which financed the War Between the States, were a major issue during the remainder of the 19th century.
There are major obstacles to understanding money. Modern academic economists, who disagree among themselves and are notoriously bad predictors, generate a lot of static. Then those who profit from certain government policies are eternally clever and energetic in spreading the impression that such policies are for the general good. The largest problem perhaps is the confusion of sequences and consequences. In a large economy, change is constant, and there are a multitude of variables. That B follows A does not necessarily prove that A is the cause of B, though that is what politicians, who cannot be said to know or care about the truth, want us to believe.
Most historical work on money in the United States does not rise very far above repeating the often-deceptive polemics of political party competition. Condy Raguet, however, exposed the fallacies of both parties in the banking and currency conflicts of the Jacksonian era.
A Philadelphian of French Huguenot origins, Raguet as a young man went to sea and established a profitable Caribbean and South American trade. In 1821 President Monroe appointed him chargé d’affaires at Rio de Janeiro, making him, in effect, the first official U.S. ambassador to Brazil. After service abroad, Raguet returned to Philadelphia, where he remained for the rest of his life. There he founded the first American savings bank. As a member of the legislature he made an exhaustive study of the banking system in the wake of the Panic of 1819. He published The Principles of Free Trade (1835) and On Currency and Banking (1839) and edited a series of newspapers and journals in which he advanced the ideas of free trade and free banking and satirized the lobbyists who were perverting the legislative process.
Philadelphia was also the home of the official national bank and of America’s most formidable opponents of free trade, the father-son team of Matthew and Henry Carey. They advocated tariffs—high taxes on imports to exclude foreign competition and guarantee the profitability of U.S. manufacturing. Three decades before Lincoln adopted the policy, Matthew Carey recommended that the Northern states use the U.S. Navy to invade the Southern states and force them to accept the tariff. This casts an interesting light on the official doctrine that the Civil War was entirely about slavery. Matthew was an Irish immigrant, and his campaign for tariffs and a large navy reflected more of a hatred of Great Britain than a concern for American welfare.
Raguet, on the other hand, maintained that tariffs artificially profited some interests to the detriment of the public and that the Constitution was not designed to enforce such a society-altering agenda, even if it mustered an electoral majority. Why did manufacturing deserve special treatment not afforded to all other economic pursuits carried on by Americans? Raguet was one of the few Northerners who fully supported South Carolina’s actions against the tariff, between 1828 and 1833. His followers during the Civil War, in the face of violent persecution, publicly argued that the Republican war on the South was in the service of plutocratic interests. But free trade had limited appeal to the Northern public.
Raguet added the weight of his learning and acuity to the long-standing Jeffersonian position against government debt, asking a simple question that to this day remains unanswered: Given that the government has an immense revenue, why does it need to borrow money, paying risk-free and tax-free interest to private bondholders? (In Raguet’s day, deficit spending had not become routine.) Indeed, why shouldn’t the government pay its bills with its own currency, treasury notes, a fully redeemable paper money, which would eliminate borrowing and provide a convenient and sound circulating medium? In the two short spans in the antebellum period when treasury notes were tried, they were successful. But the interest of the debt-holders was strong, abetted by their ease in buying or frightening congressmen and misleading the public with the mystifications of high finance.
It is in regard to the eternal question of money that Raguet’s understanding has been most unfortunately lost to future generations. Most people thought of banks as places where money was deposited and loaned out. Raguet early exposed the phenomenon of fractional-reserve lending. Depositors did not all call for their money at once, so the banks could loan out more money than they had. They created credit and paper currency out of the air and were very different institutions from mere banks of deposit. This was facilitated by a nearly unnoticed act of Hamilton as the first secretary of the Treasury, directing that banknotes be accepted as money in payments to the government. Curiously, although the Constitution forbade them from issuing paper money, the states were chartering private corporations that were doing just that. The “state banks” referred to so frequently in the Jacksonian era were not, as might be thought, government institutions, but generally were privately owned, with state charters of incorporation.
The abuse of such opportunities for profit on the part of the bankers was inevitable. The banks got the full face value of the money they created, while it depreciated in circulation, leaving the last holders with dubious paper. This was the source of the inflationary boom cycle, which had been ended by the bust or panic, the name in those days for a depression. With limited success Raguet designed legislation regulating bank charters to prevent some of the worst abuses. The British economist David Ricardo wrote to Raguet in puzzlement. Why did not the holders of banknotes simply present them to the banks and demand hard money? It was simple, Raguet replied. The ruling interests of the community were involved with the banks as stockholders, depositors, and borrowers. Any perceived threat to a bank would bring down ruthless economic and social retaliation.
Why should the banking business be limited to those with sufficient political influence to get state charters? Raguet asked. Entry should be free as in any other enterprise. In a “free banking” system the market would quickly curtail abuses.
Raguet showed his insight and adherence to principle most saliently during the 1830’s controversy over the national bank, when he exposed the shallow reasoning and vested interests that characterized both the Whig proponents and the Democratic opponents of the national bank. The Second Bank of the United States (1816-36) was, like the later Federal Reserve, unconstitutional and a grant of too much power to a government-affiliated but private corporation. The Bank enjoyed the lucrative monopoly of serving by law as the government’s banker. Most of the time, however, the Bank was under able and responsible direction. Its notes were at par, providing a reliable currency, and by grading the paper of other banks it provided a valuable check on fractional-reserve abuses.
President Jackson blamed the Bank for his personal losses when it had tried to curb inflation in the Panic of 1819. He also thought, with justification, that the Bank was wielding political influence against him. He declared that the Bank was trying to kill him, but that he would kill it first. All of Jackson’s major presidential actions were motivated by personal animosity, despite the highly inventive efforts of historians like Arthur Schlesinger and Robert Remini to portray them as ideological precursors of the New Deal.
In 1832 Jackson vetoed a renewal of the Bank’s charter that had been passed by his opponents and denounced the Bank as a bastion of aristocratic privilege. The next year he went further. By executive decree he removed all of the government’s money from the Bank, where it rested by law. This action was clearly illegal, and three secretaries of the treasury refused to carry it out, until one was found who would. The first secretary to refuse was William J. Duane, a member of Raguet’s Philadelphia free-market circle. Duane observed that the President did not know what he was doing and was being manipulated by Vice President Martin Van Buren in the interest of New York bankers who resented the national bank’s power to curtail their credit expansion.
Jackson then placed the federal funds in a collection of state banks selected by his administration. This was entirely outside the law and was considered a dangerous accretion of executive patronage. Jackson was censured by the Senate. Worse, the favored “pet” banks grasped the opportunity of government backing to churn out paper, resulting in an inflation that brought the bust—the Panic of 1837. Jackson made the mess that he had created worse by the Specie Circular, which terminated acceptance of banknotes by the government.
Andrew Jackson may have believed that he was striking a blow for sound money based on gold and silver, and he is sometimes still praised for that. His “bank war,” however, was anything but. Raguet wrote that “Jackson affects to dread a monied aristocracy; he complained of the corruption of one bank, and yet takes forty or fifty irresponsible paper-circulating banks under the national wing.” Raguet and his followers were far better “Jacksonian Democrats” than those politicians and thinkers who have been praised by historians as heroes of the people. But his wisdom had limited impact on the propaganda war between Whig national bankers and Democratic state bankers—a conflict that continued up to the Civil War.
The Lincolnians made into permanent policy everything that Raguet had deplored—a high tariff, a privileged group of national banks that anticipated the Federal Reserve, corporate subsidies, public debt, vast federal spending and patronage, inflated currency, and the steady importation of cheap labor. State capitalism (private ownership and profit with government support) became the American regime. Raguet had made a good case in favor of America’s free institutions, but that case has been, not surprisingly, trumped by that near-universal love of money.