there were definite limits to how far that process could go. Bank notes were not forced on the people as legal tender for all debts, public and private, but the government did agree to accept them
FUNCTIONED AS A CENTRAL BANK
On the other hand, the Bank was given the right of monopoly in its field, which means there were no other bank notes allowed to circulate in competition. This, plus the fact that they were accepted at face value in payment of all federal and state taxes, plus the further fact that the federal government did not at that time have a functioning money of its own, made these bank notes attractive for use as a circulating medium of exchange. The intended result was that the Bank's paper would be accepted as money, which for a while, it was. Furthermore, the Bank was made the official depository for all federal funds and it almost immediately loaned $1.2 million to the government, much of which was created out of nothing for that purpose. So, in spite of the limitations placed upon the Bank, and in spite of the fact that it was essentially a private institution, it was intended to be and, in fact, did function as a central bank.
The Bank of North America was fraudulent from the very start.
The charter required that private investors provide $400,000 for the initial subscription. When Morris was unable to raise that money, he used his political influence to make up the shortfall out of government funds. In a maneuver that was nothing less than legalized embezzlement, he took the gold that had been loaned to the United States from France and had it deposited in the Bank.
Then, using this as a fractional-reserve base, he simply created the money that was needed for the subscription and loaned it to himself and his associates. Such is the power of the secret science.
It is hard to reconcile the fact that the same men who adopted the brilliant monetary restraints of the Constitution a few years later would have allowed the Bank of North America to exist. It must be remembered, however, that the war was still in progress 1. See Murray N. Rothbard,
(New Rochelle, New York: Arlington House, 1979), Vol. IV, p. 392.
THE CREATURE COMES TO AMERICA
327
when the charter was issued, and even the wisest of statesmen are often obliged to follow expediency in such times. One also must conclude that, while the founding fathers were wise on the nature of fiat money created by the government's printing press, they had not yet had extensive experience with the same mechanism hidden behind the obscurities of fractional-reserve banking.
In any event, the Bank was not to have its charter renewed by Congress and it did not survive beyond the end of the war. Murray Rothbard details its demise:
Despite the monopoly privileges conferred upon the Bank of North America and its nominal redeemability in specie, the market's lack of confidence in the inflated notes led to their depreciation outside the Bank's home base in Philadelphia. The Bank even tried to bolster the value of its notes by hiring people to urge redeemers of its notes not to insist on specie—a move scarcely calculated to improve the long-run confidence in the Bank.
After a year of operation, Morris's political power slipped, and he moved quickly to shift the Bank of North America from a central bank to a purely commercial bank chartered by the state of Pennsylvania. By the end of 1783,... the first experiment with a central bank in the United States had ended.1
A fitting epilogue to this story was written two hundred years later when, in 1980, the First Pennsylvania Bank of Philadelphia, the "oldest bank in the nation," was bailed out by the FDIC.
AN END RUN AROUND THE CONSTITUTION
It will be recalled that, after the Bank of North America was terminated and after the Constitutional Convention "closed the door on paper money," the United States enjoyed a period of unparalleled economic growth and prosperity. But, while the door may have been closed, the window was still open. Congress was denied the power to
In the vocabulary of the common man, to borrow is to accept a loan of something that already exists. He is confused, therefore, when the banker issues money out of nothing and then says he is
Then, as now, the mysteries of banking vocabulary were not revealed to the average man, and it was difficult to understand 1- Rothbard,
I
328 THE CREATURE FROM JEKYLL ISLAND
